Finance and technology are intertwined. As technology evolves and becomes increasingly sophisticated, innovations, such as gambling platforms offering enticing deals like a $100 free chip in Canadian casino, emerge, reshaping the landscape of finance. Technological advancements have expanded how we manage our finances, offering more diverse and accessible options.
One of the biggest recent developments is decentralized finance or DeFi. In this article, we’ll look at this and discuss its potential effects on the financial world.
What Is Decentralized Finance?
First of all, what is decentralized finance, and how does it differ from the regular way we carry out financial transactions? The key word to understand here is ‘decentralized.’ It means taking control and decision-making away from a central authority or organization and giving power to any number of smaller operations.
Finance is said to be centralized because the traditional banking systems we use are controlled by a single authority, such as the government or a bank. Before decentralized finance came along, all financial transactions occurred in a central interconnected web. In other words, everything followed the same sort of procedures and rules. When you make payments or sort your finances out, you rely on a central system to carry everything out.
Decentralized finance essentially puts more power into each person’s hands. It also removes the need for third parties, i.e. banks, because it involves peer-to-peer transactions over an open network. Usually, you would have to go through your banking system to send money and make payments, but not with decentralized finance.
How Does Decentralized Finance Work?
Back in early 2009, the world’s first cryptocurrency, Bitcoin, came online. This entirely digital currency changed the landscape of finance forever. It gave people an alternative way of making online payments. Now over 14 years later, Bitcoin is hugely popular and valuable, plus thousands of other cryptocurrencies have launched after it.
Decentralized finance works in the same way as cryptocurrencies. It relies on blockchain technology, which involves an open network and peer-to-peer transactions. Basically, a blockchain is a public record of transactions that can’t be deleted or modified but keeps growing as more transactions are carried out.
What Are the Benefits of Decentralized Finance?
Crypto became widely used because of the many advantages it offers. The same is true for decentralized finance. Though it’s a lot newer compared with crypto, it has many of the same benefits. This is because of the fact that it uses the same sort of technology. Below is a summary of some key benefits of decentralized finance.
|
Benefit |
Description |
|
Transparency |
All transactions are stored on a public ledger and can be checked and verified by anyone at any given time. |
|
No need for permission |
With DeFi, you don’t need to gain permission for transactions to be carried out. |
|
Faster transactions |
Financial transactions are slowed down by banks carrying out checks. DeFi offers round-the-clock transactions that aren’t impeded by third parties and their protocols. |
|
Access to financial services |
DeFi can provide people with services such as credit and savings, which they may not be able to get from a bank. |
Is Decentralized Finance Popular?
Ever since Bitcoin launched, people have been fascinated by the idea of handling their money more anonymously and privately. Many industries have embraced crypto and actively encourage people to use it.
One such industry is iGaming. Nowadays, there are loads of online casinos and sportsbooks where you can use cryptocurrencies. There are even some sites where only crypto can be used; traditional, ‘regular’ currencies such as the euro, dollar and pound sterling aren’t accepted.
The same will probably happen for decentralized finance. If crypto can take off, so can DeFi. There’s every chance that decentralized finance will continue to grow in usage as more and more people discover it. If anything, people who are currently using crypto will be likely to use DeFi as they’ll understand how it works and what its benefits are.
Will Decentralized Finance Revolutionize the World of Finance?
So, will this modern form of finance revolutionize the financial world in any way? It looks very likely indeed. At the beginning of 2020, the number of DeFi users was estimated to be 93,000. By April 2021, that figure had grown to 1.8 million. In this period, the valuation of the DeFi market also experienced a significant increase, jumping from $700 million to $58 billion.
Decentralized finance has taken off, and there’s much room for growth. We’re only just beginning to see the start of this new way of managing finances. There’s every chance that more and more of us will soon rely on DeFi instead of banks. But for this to happen, there’s got to be confidence in decentralized finance. People must know how it works and be confident it’s safe to use.
It’s still early days. DeFi has the potential to revolutionize the financial world, but it’s got a long way to go before it starts having a significant impact.
Is There a Risk to Decentralized Finance?
While DeFi could well be the next big thing in finance, there’s also a chance it could be a risk that doesn’t pay off. Several key factors could prevent it from becoming a viable option for financial matters:
- Security threats: With DeFi, everything is on an open network, though there’s a lot of security software in place. The problem is that this can be hacked, and money can be lost.
- A lack of regulation: A key point of DeFi is that it’s beyond government regulation, for now at least. While this can be beneficial, it means that if an issue arises, you’re not protected and can’t contact a support person for help.
- Regulatory uncertainty: At some point down the line, governments could attempt to impose laws on DeFi or even regulate it somehow.
- User experience: Decentralized finance systems are quite complex and not that easily accessible. Unless things are more user-friendly, people could be put off from using DeFi.
Crypto has become hugely successful despite having the same sorts of potential risks. There’s, therefore, a good chance that DeFi will overcome these and have a bright future.
Summary
Decentralized finance is already gaining traction and could reinvent the way people manage their finances. However, the system isn’t perfect, and many kinks still need to be addressed. If things like security, user experience and regulation are dealt with, DeFi could well become more commonplace.
It could be similar to e-books and traditional printed books. Only the former existed until recently. When e-books came along, there were concerns they would take over printed books and that we’d all be reading digital books all the time. However, that hasn’t happened. Instead of dominating the publishing industry, e-books have steadily taken up a chunk of it. DeFi more than likely won’t take over traditional, centralized banking, but it could provide a popular alternative.
