Decentralized Finance, is an innovative system completely independent of third parties in which billions of dollars are beginning to be invested.
DeFi or Decentralized Finance is a concept that was born in 2019 and refers to the emerging financial technology based on blockchain. The objective of this idea is to eliminate third parties in financial transactions such as banks or brokers. Although its infrastructure and regulation are in the early stages of development, its components such as stablecoins, software and hardware allow the accelerated development of applications. Which makes this open, public and decentralized architecture boom.
To understand exactly the importance of decentralized finance, it is necessary to compare it with the typical model of traditional finance to know the differences. The concept of centralized finance refers to the current system, in which our money is kept by banks whose main mission is to make capital through intermediaries that facilitate its movement in exchange for fees. Typical situations of this system are financial transactions accompanied by a commission, loans that take days to be processed, etc.
Instead, DeFi eliminates these costs and the banking intermediaries through blockchain technology and advanced software and hardware. Just by having an internet connection you can make transfers such as payments or loans. However, thanks to the transparency of blockchain, all transactions are fully traceable by the responsible entities, giving users full control over their portfolio and assets, eliminating the need for third parties.
Although this technology is still in development, its potential to digitize, democratize and transform the world of finance is extraordinary. Specifically, some of the innumerable changes brought by the implementation of DeFi would be, for example, the elimination of the fees imposed by banks when making any transaction, the money would be stored in a secure digital wallet instead of in the bank. In such a way that anyone with an internet connection could use the system without prior identification and the transactions would be carried out in a matter of seconds. Therefore, decentralized finance adds independence and transparency to the financial sector.
On the contrary, there are aspects that need to be perfected. The first is the liquidity problem, since in October 2020 the total value of DeFi projects was 12.5 billion dollars, notably lower than the traditional financial market. The second aspect to improve is scalability. Blockchain technology requires that each transaction be publicly recorded on the network, but this limits the number of transactions. This guarantee of traceability and transparency has a very high cost. In summary, decentralized finance brings many considerable advantages for the future, but there are two fundamental problems to solve: scalability and its regulation.
As for the future of DeFi, it offers advances in the asset management sector, since each client would have complete authority over their products and could execute the purchase and sale orders themselves without having to pay commissions and benefiting from the earned interest. Another sector that would benefit would be the insurance industry. Stripped of its bureaucracy, decentralized finance would facilitate automated insurance claims through Smart Contracts. In addition, transparency in the financial sector would provide access to data in the network that would allow more informed business analysis to make decisions, discover financial opportunities or better manage risk.
In conclusion, decentralized finance needs precision regarding financial regulations and maintenance such as regular system updates and hardware failures, among others. Many answers are needed before this technology can be used but it is clear that it will be the technology of the future because it solves the current problems of the financial world.
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