DeFi – Advanced, Fair and Transparent

DeFi is an exciting and rapidly evolving space that promises to disrupt the traditional financial system. As more people become aware of its benefits, we can expect to see an increase in the adoption of DeFi across various industries and geographies.

Decentralized finance, or DeFi, has emerged as a revolutionary financial-technological phenomenon that provides a new way of providing financial services outside the traditional banking system. The access to financial instruments provided by DeFi is based on the use of smart contracts, peer-to-peer transactions, and blockchain protocols, with Ethereum being the most commonly used platform.

What makes DeFi unique is that all transactions occur outside the control of financial institutions and legislative actors. Instead, they are recorded on a distributed ledger, which ensures transparency and security, as each protocol transmits transactions through multiple servers, making it virtually impossible to alter or delete any information once it has been recorded.

At its core, DeFi relies on the principles of blockchain technology, which enables users to perform transactions instantaneously, without the need for intermediaries, such as banks or other financial institutions. Instead, the system is run by a network of nodes, which are responsible for verifying and processing transactions.

The use of DeFi is not limited to a single financial service, but rather encompasses a wide range of tools and instruments, including money transfers, payments, loans, currency exchanges, and insurance. These tools and instruments have existed in traditional, centralized systems for centuries, but DeFi provides a new way of accessing them, which is more efficient, secure, and transparent.

The decentralized nature of DeFi is one of its most significant advantages. By eliminating intermediaries, DeFi provides users with greater control over their finances, enabling them to transact without restrictions or the need to pay fees to third parties. Moreover, DeFi is accessible to anyone with an internet connection, which makes it a game-changer for the unbanked and underbanked populations around the world.

The reason for the emergence of DeFi

The emergence of DeFi marks a significant paradigm shift in the financial industry. It offers a greater degree of accessibility and inclusivity to a wider range of people, without the need for centralized authorities or intermediaries. While it may not entirely replace traditional financial systems, DeFi serves as an additional tool to accelerate, improve, and expand the range of financial services to those who lack access to banking services, while also reducing costs and speeding up certain processes.

One of the primary problems that DeFi addresses is the slow and cumbersome settlement of financial instruments in the international financial system. Settlements can take several days to execute, clear, and settle, leading to inefficiencies and delays. The process often involves human intervention, which can result in errors and high costs.

Another challenge that DeFi aims to overcome is the limited liquidity and access to certain financial instruments due to the centralization of the financial system. This leads to higher costs for end-users who need to maintain liquidity of a particular financial instrument, making it difficult for some to access such services.

Through the use of decentralized technologies, DeFi seeks to offer a more efficient and cost-effective alternative to traditional financial systems. By eliminating intermediaries and central authorities, DeFi can provide greater transparency, security, and accessibility to financial services. It is a revolutionary concept that has the potential to transform the financial industry and make it more inclusive and equitable.

The traditional banking system is inaccessible to many individuals worldwide, primarily due to lack of identification, income, or other factors, leading to financial inequality. DeFi has emerged as a decentralized alternative that provides financial services and products without relying on intermediaries, promoting greater transparency, speed, and efficiency in transactions.

DeFi’s most significant advantage is its ability to offer credit without discrimination or human intervention. This is possible by leveraging decentralized platforms and blockchain technology to evaluate creditworthiness based on a wider range of factors, including social reputation, rather than relying only on past indicators, which may not be relevant in the current financial climate. In doing so, DeFi promotes a more inclusive and accessible financial system that empowers individuals who would otherwise be excluded from traditional banking services.

The idea and the goal

DeFi represents a significant paradigm shift in the way we approach finance, moving away from centralized systems and towards a more decentralized and democratized approach. While there are still many challenges to overcome and areas for improvement, the potential benefits of DeFi are vast, and it is an exciting development to watch as it continues to evolve and mature.

The ethereum network is widely used for decentralized finance, or DeFi, which represents a much more extensive and sophisticated process than a simple cryptocurrency transaction. While blockchain technology allows for the secure transfer of value, DeFi aims to create a financial ecosystem that is entirely decentralized and without intermediaries, making it accessible to everyone.

This ambitious goal of DeFi is rooted in the fact that many people worldwide are still unable to access traditional financial services, often due to various barriers such as lack of identification, limited income, or discrimination. These obstacles exacerbate financial inequality and prevent people from participating in the global economy.

DeFi seeks to eliminate these barriers by offering a range of decentralized financial services that anyone with internet access can use. Unlike traditional financial systems, which rely on centralized institutions and middlemen to facilitate transactions, DeFi relies on decentralized platforms that operate on the ethereum network, such as smart contracts and decentralized applications.

By leveraging blockchain technology, DeFi is designed to be transparent, secure, and efficient, allowing for faster and cheaper transactions while eliminating the need for intermediaries. This not only benefits individuals who previously had limited access to financial services but also has the potential to transform the financial industry as a whole by creating a more inclusive and equitable system.

In the current landscape of financial markets, ensuring the liquidity of assets in peer-to-peer transactions is often uncertain due to the possibility of an entity offering a price that does not align with the buyer’s willingness to pay. This inherent risk of asymmetrical actions makes the goal of DeFi advocates more than just a desire for fairness towards those who are discriminated against in the traditional banking system. Instead, the aim is to eliminate various financial and technological issues that arise from such asymmetry.

The DeFi concept represents an attempt to develop a financial system that operates independently from centralized authorities or intermediaries. However, it is important to note that DeFi transactions can only occur on platforms that possess the necessary technical capabilities and align with customer expectations that are not being met by existing services. Thus, the success of DeFi requires collaboration among various actors worldwide to broaden the scope of joint action rather than competing with other platforms to create their own DeFi ecosystems.

This collaborative approach involves pooling the skills of various actors, including developers, investors, and users, to create a more comprehensive and decentralized financial ecosystem. This involves developing innovative financial products, designing secure and efficient blockchain technology, and ensuring user accessibility to the platform. By doing so, DeFi aims to create a more inclusive financial system that empowers individuals who are currently excluded from traditional banking services.

Inclusion of the marginalized

It is important to note that while DeFi is a powerful tool for increasing access to financial services, it is not a panacea for all the issues facing the financial industry. It would be unrealistic to imagine that DeFi will completely eliminate the need for traditional banking services, as there will always be certain functions that are best served by centralized institutions.

However, the development of DeFi is aimed at creating a more inclusive financial system that brings in a larger number of individuals who were previously excluded from the traditional system. By doing so, the amount of money in circulation can increase in compliance with applicable regulations, thereby supporting economic growth.

To better understand the importance of inclusion, consider a scenario in which a worker is unable to open a bank account due to a lack of valid identification documents, citizenship, or other reasons. As a result, the individual is paid in cash, which further deprives them of money. While the worker may have earnings, they are not recorded anywhere, which can prevent access to pension insurance, loans, and other rights that others enjoy. This highlights the importance of financial inclusion and the role that DeFi can play in supporting it.

The problem of financial exclusion is particularly acute among minors who perform various tasks, both voluntarily and involuntarily. Often paid in cash, they receive no legal proof of income, and are completely marginalized and deprived of the benefits of the formal financial system. Enabling such individuals to become users of decentralized finance (DeFi) would not reduce the number of bank clients, nor harm existing financial institutions. Rather, it would bring these marginalized entities into the legal flow of financial systems.

In the financial-technological sense, DeFi offers several advantages, such as the ability to manage assets individually at any time according to market rates created in real-time by an active group of actors. Additionally, all processes take place in a decentralized and uncensored manner, without the need for banking or government institutions, with the added benefit of audit visibility and control in relation to the offered and executed contracts.

One of the key imperatives that DeFi brings is the increase of transparency, with a non-discriminatory or restrictive approach. It enables individuals to participate in the financial system without facing the traditional barriers of exclusivity or discrimination, opening up new opportunities for individuals who are marginalized or excluded from the formal financial system. DeFi is not meant to be a replacement for traditional banking services, but rather a complementary system that can offer greater financial accessibility and inclusivity to a wider range of individuals.

Decentralized loans

DeFi is revolutionizing the lending sector by offering a unique approach to borrowing that operates without the need for credit scores or transaction histories.

The protocols utilized by DeFi lending applications are founded on the principle of guaranteeing loans with cryptocurrency collateral. Thus, for each amount borrowed in cryptocurrency, the borrower must pledge collateral, also in cryptocurrency, where the ratio of the size of the collateral exceeds the loan amount. This requirement ensures that the borrower is accountable for their loan and has an incentive to pay it back, as the collateral may be liquidated if the borrower fails to repay the loan.

While DeFi lending applications offer a unique approach to borrowing, there are several characteristics of the platform that require a shift in traditional practices. For instance, the process of connecting lenders and borrowers can take place through a peer-to-peer concept, where lenders and borrowers are connected directly, without intermediaries. This creates a level of trust between parties that is absent in traditional lending, where borrowers and lenders are often connected through a bank or other intermediary.

Another characteristic of DeFi lending that requires adjustment and adoption of different habits is the immutability of transactions. Once a transaction is made on the blockchain, it cannot be reversed, and all transfers are permanent. Therefore, it is imperative for users to double-check all transactions before they are executed to avoid any mistakes or errors.

Despite the need for adjustment to these unique characteristics, the DeFi lending ecosystem has proven to be a reliable and efficient alternative to traditional lending, providing access to credit to those who may not have access to traditional banking services.

Decentralized lending is one of the crucial services provided by DeFi, which is carried out through cryptocurrency. Unlike traditional lending services, the creditworthiness of the borrower is not determined by their transaction history or user rating. Instead, DeFi protocols require collateral, which should be greater than the borrowed amount, to ensure the loan is granted. The deposited collateral is also in the form of cryptocurrency.

However, in case the borrower fails to repay the loan or the value of the collateral decreases, the collateral is liquidated without any further negotiations. In addition, if the borrowing capacity is affected due to the decline in the collateral value, liquidation takes place, and the guarantee is then sold at a unit price, which is lower than the market price.

Capital withdrawals from DeFi platforms can also be quite different from traditional finance. It depends on liquidity to a much greater extent. Furthermore, the responsibility for all transactions and asset management lies entirely with the individual, rather than with any central authority.

It is essential to note that DeFi is not the ultimate solution for all financial problems. Instead, it is just an emerging concept that still requires improvement and development. Therefore, it is important to understand the underlying principles of the concept and not equate it with any previously known processes in the financial market. Furthermore, it is also important to note that DeFi is not meant to be a competition to banks but rather a complementary service to the traditional financial system.

In the future, we will see the real scope of DeFi as new projects and innovations are emerging. Therefore, it is necessary to keep an open mind about this approach and not idealize it. Despite its potential, it still has some limitations, which require careful consideration before adoption. However, DeFi is an excellent opportunity for individuals who do not have access to traditional financial services to become part of the financial ecosystem.

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This content was brought to you by VISA, the global leader in digital payments, whose mission is to connect the world with an innovative and secure payment network to enable individuals, businesses, and economies to grow.

Visa is the general partner of the Fintechlopedia project, an electronic glossary containing all relevant elements of digital transactions and related phenomena, situations, processes, and innovations.


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