The Shift Towards Decentralized Finance: Why are Financial Firms Turning to Crypto?

by | Sep 24, 2020 | Industry | 0 comments

The global financial system indeed generates a lot of wealth, but its centralized nature only rewards those who are well connected to the financial tools. As inequality continues to increase worldwide, we need to ask ourselves how wealth generation instruments can be more accessible to everyone.

Fortunately, technological advancements and their mass adoption make this the appropriate time for a decentralized financial system to prosper:

· The internet: 4.39 billion users by the end of 2019.

· The growth of smartphone use: there were 5.11 billion unique smartphone users worldwide by the end of 2019.

· Digital banking: there were more than 2 billion users by the end of 2019.

· Blockchain and cryptocurrencies: the emergence of new public blockchains.

What is Decentralized Finance (DeFi)?

Decentralized finance refers to a revolutionary decentralized financial system built on public blockchains, like the Ethereum blockchain. Six main characteristics single out public blockchains from private ledgers used by governments and banks:

Permissionless: Everyone from any part of the globe can access the network.

Decentralized: Transaction records are stored simultaneously across thousands of computers (nodes).

Trustless: A third party is not needed to validate transactions.

Transparent: Every dealing is publicly auditable.

Censorship resistant: A central authority cannot invalidate user transactions.

Programmable: Developers can program business logic into cost-effective financial services.

In a decentralized financial system, users have access to applications that leverage blockchain to take part in new open, borderless markets- but how would this transform the traditional financial system to an advanced level?

The potential of Decentralized Finance (DeFi)

Below are the five primary ways that DeFi will have an impact on the world:

1. Borderless Access to financial services

With decentralized finance, anyone with a smartphone and internet connection can access financial services. Several barriers limit access in the traditional financial system:

· Status: Lack of citizenship, documentation, and credentials.

· Wealth: High entry-level capital is required to participate in wealth creation.

· Location: Far distance from functional economies and banks.

A decentralized system offers an equal playground to a top stock exchange trader in New York City and a sugarcane farmer at Ahero Village in Kenya.

2. Cost-effective cross-border payments

Decentralized finance eliminates the need for costly mediators, making remittance services cheap for users. In the traditional financial system, it is extortionately costly to send money from one country to another: the average international remittance fee is 7%. DeFi lowers remittance charges to almost 2%.

3. Enhanced security and privacy

In decentralized finance, customers exercise control over their assets and can transact safely without a central bank’s validation. On the other hand, custodial establishments put users’ wealth and personal information at risk by centrally storing them.

4. Censorship-resistant transactions

In a DeFi system, transactions are immutable, and networks cannot be shut off by central authorities like governments and central banks. In jurisdictions with weak governance and authoritarianism, people can run to a decentralized financial system to protect their assets. For instance, Venezuelans turned to Bitcoin and other digital currencies to protect their wealth from government manipulation and hyperinflation.

5. Simple use

Plug and play apps allow users to easily leverage decentralized financial services without the traditional centralized system’s intricacy. With a DeFi app, a person from Brazil can apply for a loan in England, invest in a business in Singapore, and then pay off her debt and buy a property in Minneapolis.

Tokenizer Blockchain Banking Platform

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.

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