All of us know what decentralization is. Well versed with the common economic topic, everybody knows how the activities, along with the authorities, of an organization, are distributed or delegated away from a central authority. Concepts of decentralization have been applied to various dynamics including private businesses, economy, administration, and money.
Money, that is what all of this is about. We very well know what fiscal decentralization is, but what do we know about the Decentralisation of Finance? To put it as simply as possible, DeFi is the movement that leverages decentralized networks to transform old trustless and transparent financial protocols that run without intermediaries. Basically, it is an attempt to move towards the promise made by bitcoin in 2009, the promise to make money and payments universally accessible. Smart contract blockchains, like Ethereum, have made it possible to have an open alternative to every financial service used today.
When a given set of conditions are met, blockchains automatically execute “smart contracts”. These are the decentralized networks we have been talking about initially. Popularly known as Dapps, they enable developers to build far more sophisticated functionality than simply sending and receiving cryptocurrency. Unlike working for a centrally controlled entity, Dapp, as the name suggests, works as a decentralized application.
Sounds like something out of a utopian sci-fi movie doesn’t it? As fictional as this sounds, you will be surprised to know that Dapps are live as of now. DeFi apps allow you to create stablecoins, a cryptocurrency pegged to the US Dollar; lend out money and earn interest on your crypto; take out a loan; exchange one asset for another; and implement automated & advanced investment strategies.
Right now, the word decentralized isn’t entirely true to itself. Many projects today have master keys for the developers to shut off these applications but as the code becomes more battle-tested, it is expected the developers will let go of backdoor switches and allow stakeholders to vote on decisions.
The first generation of DeFi applications depend heavily on the availability of collateral as a safeguard, i.e. you need to have Crypto to avail Crypto. Further, these programs are made by blockchain enthusiasts for blockchain enthusiasts, but with the current scenario of digital development, Crypto wallets are the future of money storage, as we move towards a truly decentralised financial system. I say so because 2019 witnessed a very rare phenomenon where a whole new industry starts to blossom with more than 600 million dollars in its kitty.
Left you wondering how did this happen, didn’t it? That’s the effect of financial decentralization on the world and trust me when I say this, it is just a drop in the ocean!
Read about DeFi’s impact on Traditional Banking at: https://thestorylane.com/decentralisation-of-finance-impact-on-traditional-banking/