As we continue on, it is truly inspiring to witness the global adoption of new technologies in overcoming development challenges. Last week, we explored the remarkable impact of blockchain technology in various African countries, revolutionising sectors such as finance, education, and legislation.
Today, we shine our spotlight on a fast-rising phenomenon, greatly furthered through blockchain technology – decentralised finance. Welcome to a paradigm shift where the traditional rules of finance are rewritten.
Decentralised finance, or DeFi, challenges the centralised financial system by empowering individuals with peer-to-peer transactions.
A Revolution Unfolds
DeFi isn’t a distant dream; it’s a living reality reshaping the financial landscape. It offers a vision of finance that is transparent, accessible, and owned by the people – financed by the people, for the people. Creating a world where financial transactions are governed by decentralised technologies instead of centralised authorities.
The Current Financial Landscape: Cracks in the System
People and businesses are continually seeking a quicker, more secure, and cost-effective method for peer-to-peer (P2P) financial transactions. What DeFi brings to the table extends far beyond a small improvement, unlike the introduction of automated teller machines or direct deposit, for instance.
The present banking system limits the autonomy of its clients. Restrictions can easily be placed on the amount of money you can transfer and withdraw. Access to your own money is further controlled by the policies of the bank. Behind the scenes there’s no privacy to where and who your money is going. At the same time, where your personal details like an ATM card is stolen, it is easy for monies to be moved without your authorisation.
Most of these limitations and controls are based on attempts to secure clients from fraudulent practices, identity theft and maintain the banks cash reserve.
With the growth of the internet and the increasing interconnectedness of the world, international business operations are becoming more prevalent. However, traditional banking systems are often ill-equipped to ensure smooth and efficient funding for these transactions. As a result, business professionals are seeking alternative solutions to make these operations more seamless.
By using a decentraliaed ledger system, blockchain technology eliminates the need for intermediaries and allows quicker and more secure transactions. This approach allows for a significant reduction in service fees, and the transfer and exchange of assets can be nearly impervious to tampering.
How DeFi Works
DeFi, often associated with cryptocurrencies, extends beyond creating digital currencies. Its core function revolutionises finance by offering familiar services like loans, interest on deposits, and decentralised payments, all while ensuring accessibility for everyone. Leveraging cutting-edge technologies such as blockchain and smart contracts, DeFi aims to establish a financial market open to all, operating without the need for complete interpersonal trust or banks’ permission. It’s a lofty goal set to improve the current financial system, making it more user-friendly, enjoyable, and inclusive for businesses and individuals alike.
DeFi employs smart contracts to replace conventional financial systems. Here, there are no banks or institutions overseeing your money, as middlemen’s involvement in approving transactions for DeFi applications is eliminated. This streamlined process removes complicated approval steps, allowing borrowing, lending, saving, exchanging, and obtaining insurance directly through smart contracts on the blockchain. This not only provides alternatives to traditional finance but also sparks new ideas and innovations in the financial space. It’s like a direct connection between you and your finances, with the added factor that the code governing DeFi is open for anyone to check. This transparency is crucial, and DeFi operates on open networks that stretch across different countries.
Financial Inclusion: Unleashing the Power of DeFi
Just as we witnessed in our last article in Africa, financial inclusion remains a compelling use case for blockchain technology worldwide. DeFi emerges as a solution that enables financial transactions without the need for traditional intermediaries.
Across the globe, countries like India, Brazil, and the Philippines have embraced innovative decentralised financial systems. These systems empower individuals to transact, save, and invest directly, bypassing the limitations and complexities of traditional banking systems. By leveraging blockchain technology, DeFi platforms offer secure, transparent, and efficient financial services to previously underserved populations.
Your Financial Journey with DeFi
As you delve into the world of DeFi, educate yourself, exercise caution, and embrace the power that decentralised finance puts into your hands. As the year draws to a beautiful end, next week we are going to be exploring my top 3 areas in fintech that you should keep your investment eye on come 2024. The third one is already making waves in Spain.