Decentralized Finance is gaining momentum as a sub-sector that could transform the traditional financial system. In contrast to the decentralization of money via bitcoin, DeFi leverages a broader approach of generally decentralizing the traditional financial sector. The initiative aims to open the traditional financial sector to everyone, in offering a permissionless financial service ecosystem build on blockchain technology.
In Part I of this DeFi series, we are going to learn what DeFi is and distinguish it from the traditional banking system. Stay tuned for more insights.
What is DeFi?
DeFi is an ecosystem comprising of apps built on public blockchain networks to facilitate permissionless financial services. In a layman language, DeFi tries to decentralized core traditional use cases, such as trading, lending, investment, wealth creation and management, payment, and insurance on public distributed ledgers.
DeFi is based on Decentralized Applications (dApps), or protocols. By running these apps on a blockchain, it provides a peer-to-peer (P2P) financial network. Smart contracts can be used to connect these dApps, just like APIs in traditional systems.
An overview of the traditional financial system
The traditional financial system is centralized. Central bodies, such as Fed or BoE, issue and regulate government currencies that drive the economies of their countries. In this case, the power of managing and controlling the demand and supply of currencies lies with these bodies. As citizens, we also surrender the control of our assets to financial bodies, like banks, expecting to get better returns.
Now, what are the problems of a centralized financial system?
Central bodies are run by humans and the saying, error is to humans, is true. Let us consider what happened to Venezuela. Poor government policies, like printing more money at a period when was a big drop in oil prices, caused inflation of almost 1,000,000%.
Since economic downfalls is a broader topic, let us consider a topic that we mostly relate with- investment. Even if we ignore the point of disparity between those who have access to the stock market and those who do not, we get zero control on how our investments are used. The solution to all these financial problems created by the lack of an open system is decentralization.
Differences between traditional finance and DeFi
At its core, the operations of DeFi are not managed by establishments and employees. Their role is replaced by coded algorithms through smart contracts in the DeFi infrastructure. Once a smart contract is deployed to a blockchain network, DeFi apps run without any human intervention.
The second difference between traditional finance and DeFi is that the latter has the power of code transparency. Code transparency makes it allows for any participant to audit, further developing trust with users since everyone is allowed to understand the contract’s functionality. And because the transactions are pseudonymous, privacy issues never arise.
Unlike traditional banking system that is geographically limited, dApps are designed to run globally. Regardless of which jurisdiction you come from, the access to DeFi networks and services are the same.
Unlike the traditional financial system, there are no gatekeepers on DeFi platforms, and users interact directly with smart contracts from crypto wallets. Anybody can build a decentralized finance app and anyone can use it.
The Tokenizer End-to-End DeFi infrastructure
Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves: equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.
Are you in need of raising funds or investing in security tokens? Apply to raise funds in Tokenizer by visiting opening an account here. If you want to invest in security tokens, contact us by creating an account here, and if you want to liquidate and trade-in Asset-Backed Tokens, we have a decentralized exchange designed for you. You can also contact us to order a metallic crypto card at $149 only.