How Defi is Filling the Shortcomings of Centralized Finance
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How Defi is Filling the Shortcomings of Centralized Finance

November 29, 2020      Evan Luthra

It may sound like a completely ridiculous notion when one comes up and raises a voice, over changing the entire system, inside and out. It’s not an electronic mechanism that needs fixing with a handful of tips and tricks. It’s a living breathing organism that governs the very asset that aids our survival. Currency, money, cash, fiat- call it whatever you may, the bottom line is that even though we spent our entire lives earning it, we have little to no control over it.

This isn’t about how much money you spend or you get, it’s about who sits at the end of the gate and checks the ticket for it. Centralized finance has been the governing force behind regulating the currency that has run global finances for hundreds of years. However, it requires the trust over those intermediaries that may or may not be worthy of it. Well, they can’t all be Thor!

Technology has proved its worth over time. Maybe not all of it, but yes many have become a revolutionary force and to this day aids to the basic luxuries that were once beyond imagination. Such is the technology that gained the name by blockchain and is now fueling the course of Defi.

Decentralized Finance (Defi)

Defi, short for decentralized finance, by its very definition, eliminates the middle man right out of the picture. It’s madness to see the current finance system dependable at the hands of financial institutions like banks, who can’t be trusted and at the very least fail to provide transparency. Decentralized finance is a growing vision of those who have placed their cards on blockchain technology.

Blockchain constitutes for a public ledger containing a record of all the transactions. Its block-like structure and interlinking provide security, transparency, and untampered access to data. With the use of blockchain, Defi aims to provide complete control to the public over monetary assets through the elimination of financial authorities by smart contracts.

Various companies are already investing heavily in DeFi projects. Lately, I have provided  $50,000 in liquidity into ICHI.Farm’s oneBTC, which is the world’s first Bitcoin stablecoin and is wholly backed by USDC and oneETH. However, an algorithm will decrease the required amount of collateral (USDC) to mint oneETH by 0.5% every day that oneBTC price remains stable at $1 until it reaches a minimum percentage set by a community vote, where each oneBTC-wBTC LP token represents a vote.

There’s clearly a reason for my inclination and hundreds and thousands like me towards this decentralized structure, which stems from the flaws that plague centralized finance today.

Where CeFi Lacks?

Defi’s benefits stem from the many benefits pegged with the traits of blockchain technology and fills the shortcomings that engulfs Cefi.

Transparency

Probably one of the biggest drawbacks of all time, when it comes to centralized finance. Our financial system fails to provide any record of money that is supposed to be used for the development and good of the country. The taxes paid by the responsible citizens have no record to justify its applications. The covid relief package is one of those many examples of fake promises concerning money for public aid.

With decentralized applications (Dapps) storming over the crypto market, a transparent yet efficient implementation of blockchain is possible. Let alone taking control over your own transaction, you can track anyone’s if you wish to. This can help in creating a completely trustworthy financial system, with no chance of external or internal manipulation of data by authorities or anyone else for that matter.

Accessibility

Anyone who has participated in any form of digital transactions, would surely have heard of that population of billions who are unbanked. There are many who do not have access to a bank account- a huge shortcoming on Cefi’s part due to lack of incentives. Since Defi has the luxury of operating without costly intermediaries, those unfortunate ones can be given access to a digital form of payment.

Tradability

Tokenization is the highlight of the crypto world, fuelling the community to one of the most valuable aspects of Defi. Creating tradeable tokens and using them to incentivize networks and thousands of Dapps have brought a plethora of opportunities for investors, entrepreneurs, traders, miners, etc.

Moreover, a currency that has no interference from a governing authority that controls, validates, and charges for conversion of any other currency into their native one, enables ease and efficiency to its users automatically.

Decentralized Finance Applications

Maximum applications that ride on Defi are built on Ethereum, the second largest cryptocurrency in the world that has established itself as a platform for building other Dapps and launching smart contracts apart from just traditional transactions like bitcoin. With the help of smart contracts, many Defi applications are successfully working on Ethereum and with the ongoing upgrade to Ethereum 2.0, these apps will get a further boost at the altar of ethereum’s increased scalability.

Lending

One of the most used cases of Defi applications, Compound is a famous platform that allows lending and borrowing of cryptocurrency and provides loans. The lenders this way, get the opportunity to make money off of the interest. The rates on Compound are fixed algorithmically with respect to the high demand of the particular cryptocurrency. The network does not require users to give out their identity or link any credit card. The user simply needs to put in collateral- ether, the native currency of Ethereum, in order to take a loan.

Prediction markets

Prediction markets in the crypto world saw its great use during the recent US presidential election 2020 with the trump token. Entertaining as it was, it was a great example of betting on the outcome of an event to make some money. Defi shows great potential to promote interest in the prediction market, something that is technically frowned upon by the central authorities.

Stablecoins

One of the very few drawbacks of cryptocurrency is volatility. The price of Bitcoin for instance, has been on a never ending journey of fluctuations and unpredictability. Stablecoins are a way to shield users of the sharper fluctuations which is not exactly a redeemable quality for a monetary asset. So Stable coins peg cryptocurrencies to currencies like the U.S. Dollar in an aim to bring stability and keep the price under control.

Conclusion

Along with the expansion of the above markets, there are some new concepts budding around them with amazing opportunities and massive gains like yield farming, liquidity mining, money legos, etc. Even with the extraordinary vision carried under the umbrella that is Defi, many believe it to be risky and lacks trust in the crypto world. But there is no dearth of avenues today if you want to invest in DeFi projects. For instance, Routemaster Capital INC is a publicly listed company on the Candadian Stock Exchange that allows people interested in DeFi to buy its stocks without requiring them to possess any crypto assets. This gives them access to DeFi projects. Defi has proved to have potential as the future of finance and investing in it at an early stage could definitely result in great profits.

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Evan Luthra
Evan Luthra

Evan is a tech-obsessed thought-leader who has spoken at 100s of conferences around the world. He has extensive knowledge and experience in mobile apps and his company, EL Group International, has developed and delivered mobile apps for major Fortune 500 companies. He has also received an honorary Ph.D in Blockchain for the impact he has made in the industry from launching Blockchain Schools to Blockchain Coworking spaces and having spoken at 50+ Blockchain events. As a highly accredited Angel Investor, Evan believes in stepping out of his comfort zone and exploring the power of conceptualization, innovation and execution.