“Your money, your control” - Is Decentralized Finance (DeFi) the way forward?
Welcome to the future of banking, a place where there are no intermediaries to do the financial transactions, maintain a ledger or to safe keep the assets but only the user, his money, and yes the computer codes. To be specific, Blockchain technology-based, Ethereum owned- DeFi (Decentralized Finance).
DeFi is an emerging digital financial infrastructure that theoretically eliminates the need for a central bank or government agency to approve financial transactions. It makes popular stands for self-custody finance. Unlike the system of traditional finance, no one has access here but the user.
Coined in 2018 by Ethereum and a group of entrepreneurs, the idea was to avoid manipulation and the possibility of alteration in the ledger of transactions.
But why DeFi?
Historically, centralization in finance was regarded to be more secure and stable than personal administration and was thought to be the maintainer of stability in global financial operations. But, here’s the truth: the centralized finance sector is only as stable as we consider it to be. Talking realistically, centralized financial systems are impacted by a variety of problems such as fraud, forgery, questionable lending processes, banking accessibility, financial stability, accountability, and many more. Despite the growing use of centralized financial institutions, there are still significant accessibility barriers.
Comparatively, decentralized finance being a new type of financial system that is built on the foundational open-source networks of Bitcoin and Ethereum, offers many improvements to current financial systems found across the globe. Also, now that more individuals are calling for control of their data, ownership, and money, decentralization is being marked as a possible solution.
DeFi is a concept and it is expanding its capabilities of cryptocurrencies beyond just currency, allowing developers to create sophisticated systems with a wide range of applications, known as decentralized apps, or dApps. As these DeFi apps run on the Ethereum blockchain, they provide relatively quick and low-cost transactions along with financial contract immutability and contract automation. Other hosts like Binance Smart Chain (BSC), Polkadot, Polygon, and Tezos are witnessing widespread adoption due to the high gas fees charged by Ethereum recently.
It is generally referred to as ‘Open Finance’, as a result, all protocols are open-source, making it composable. It allows anyone to develop new financial products with no limit to what they can build and allows individuals from all over the world to collaborate and invent new ways to create value. This is why Ethereum is called a “Money lego’ platform.
Why the hesitation then?
Everything new comes with a set of certain pros and cons but also chances of improvement. In Mozgovoy’s words, “DeFi is new and experimental. Since everything is code, it can have bugs. Bugs lead to money loss or hacks. DeFi is new and complicated.”
DeFi is still plagued by breaches and frauds, such as "rug pulls," in which hackers drain cash from a protocol. During an incident in July, Poly Network, a platform of DeFi was hit by hackers, who pulled off the biggest ever cryptocurrency heist. They stole $613 million in digital coins but returned $260 million back.
Decentralized finance grew to an $80 billion industry in 2021 and is poised to explode 10-fold, but if put in Matthew Roszak’s words,"$80 billion is still a rounding error for finance." A fast-growing industry is not necessarily always a big one. In this industry, the biggest challenge of all is to maintain today’s breakneck growth. Low liquidity and difficulty in switching between blockchains make current DeFi systems slow or even unreliable.
Decentralized platforms are sometimes slower than centralized ones. centralized cryptocurrency exchanges take an average of 10 milliseconds to execute orders, while decentralized exchanges take a minimum of 15 seconds. As if this was not enough, the Reserve Bank of India is looking to red-flag DeFi platforms as India does not have any regulation to deal with cryptocurrencies, let alone DeFi.
Can we expect a bright future for DeFi?
In the world of DeFi, counterparties interact directly via so-called smart contracts which are more efficient and fairer.
EQIFI, the new DeFi protocol solving many problems, provides a complete, community-governed, single interface DeFi solution where users can manage their entire banking, trading, and lending services for fiat and cryptocurrencies; addressing the issues of efficiency and speed. It is a one-of-a-kind organization. It acts as a one-stop shop for the most popular, useful, and profitable financial goods, all in one place.
As one of the original goals of DeFi was the simplification of relations between credit institutions and borrowers, therefore comes, No-Collateral Loans. This unsecured lending by DeFi has helped popularize the market by making loans more flexible.
Not only this but DeFi is the new market for Crowdfunding. Mantra DAO, a community-governed DeFi platform, raised $5.9 million as part of this progression, to make crowdfunding more decentralized to avoid wealthy investors from exerting too much control.
Is it likely that in finance, decentralization will completely replace centralization? Both yes and no. Centralized finance has until now appeared to be the most trustworthy option, but it is also plagued by a slew of issues that are fuelling public discontent. Decentralization holds new promise, but it has yet to reach the level of operating capacity required to completely replace existing infrastructure. What is more likely is that a hybrid of both systems will be the future of finance, providing end-users with the best of both worlds.
Author: Ramya Sehgal
Illustration by: Sai Aditya