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DeFi: Taking Finance from Wall Street to Main Street

With the rapid rise of cryptocurrencies, digital finance seems poised for promising a lot of potential beyond just profit. Since blockchain has been booming, there’s a new form of finance taking the economic ecosystem by storm. Decentralized finance – DeFi – is offering a beacon to the everyday individual in the world of finance. We’re here to walk and talk you through it all.

What exactly is DeFi?

In essence, decentralized finance is an umbrella term that refers to different financial applications built on blockchain. At the heart of it, DeFi is designed to defy and disrupt the middle-man system as we know it.

What’s important (and immensely exciting) about DeFi is that it operates without any central governance or human gatekeepers. Instead of having one person (or entity) in the driving seat, the ecosystem is powered by the community and the innovative blockchain technology is built to drive it.

Through technology, DeFi allows a way to open up the financial industry, where transactions, lending, borrowing and payments are seamless and available to anyone and everyone. No one runs decentralized finance, meaning the risk of any bias or hoarding money in one place is completely mitigated.

Keen to know a little more about the history of decentralization? Grab a quick cup of whatever tickles your fancy and give this a watch.

How DeFi is set to change the financial game

Since the launch of blockchain-based currencies and applications, we’ve seen the financial world start taking the steps towards an evolution. There’s a shift in power and economic control is coming back to the people. 

Think about it. It wasn’t all that long ago that Armani suits on Wall Street ruled the world of finance. They had a say – sorry, they had the say in where the money goes and who gets what. 

Looking for a loan but have a tattoo? Sorry, bud. Shoulda had a rethink on that ink. Hair too long? That’s where you went wrong.

And this isn’t even mentioning the fact that banks use their customers’ money to take profit but there’s little in the way of hoping they’ll give back or offer fair loans. Wall Street is set up so that the bankers and financial execs have their cake and eat it too. In return, everyday Joe has to work with the crumbs left over. 

So yeah, Wall Street ruled finance. With all the info and insight, the Suits were about to profit from the system. They raked in the cash and shared it as they saw fit. 

The game-changing puzzle piece

When the tech sector started expanding, money moved from the suits to Silicon Valley. The tech-guys in hoodies threw a (much-needed) spanner in the works and we saw the emergence of a new sort of financial ecosystem. A more fair system boasting the first chance of genuine financial freedom for individuals.

That stepping stone, while an exciting and necessary one, bore its issues. While some Silicon Valley projects offered incredible innovative ideas, some tech projects brought in democratization but at a cost. Robinhood’s recent scandal acts as an apt representation of how an allegedly centralised investor-focused project can be caught up in a profit-powered move that has whisperings of Wall Street antics.

DeFinally: a chance for financial freedom

With the introduction of DeFi, though, the financial system has started taking the right steps from Wall Street to all streets. The rapid shift has opened up the industry to anybody. Yep, even those with tattoos and long hair. 

Remember that cake? DeFi means that each person gets their very own cake to divide it however they wish. It gives Joe complete control of his finances and he doesn’t have to settle for the crumbs. This equitable approach to finance means that the distribution of money isn’t biased towards one group of people. DeFi means the financial system flips to a fair one instead of partial preference to only those who profit.

The small problem is that shift is laced with complicated jargon and a bit of a lack of understanding. Blockchain is complicated. There are no two ways about it. And inherently, if people don’t understand something they struggle to put their trust in it. This leads us to a key point here: Trust.

You see, people are used to having to learn to trust something or someone. 
But this new step in the evolution of finance is not about building a better-trusted solution. It’s about building a trustless one.

Trustless DeFi

Blockchain technology strips the need to trust a person, a corporation or a central entity. This is because trust is distributed across many different entities in the system instead. As a result, trust becomes democratic, systematic and is fully based on the integrity of the extremely well-designed technology. (This article explains this concept in more depth.) 

Essentially, this means that individuals don’t need to trust anyone. Blockchain technology resolves these concerns, eradicating human error and possibilities of manipulation. 

It gets better too. Because blockchain offers transparency and decentralized finance networks are public, every transaction can be seen – although it’s anonymous. This puts everyone on the same page because the same information is available for all to see. While you might not know who is transacting, you can see what transactions have taken place.

Blockchain networks also drive like a well-oiled system where there’s fluid interoperability. Think of lego blocks that work with one another. You might have different looking ones with different sizes, but you can still put them together pretty easily.

It offers the same kind of frictionless composability where the technology can combine things like insurance, finance, investment, and loaning (which all are like different sized lego blocks) together in different ways and it still makes sense. 

So DeFi offers a little more than just digital money. It represents the possibility of a complete financial overhaul – one that works for everyone.

Is DeFi going to go mainstream?

As we’ve said, we can attribute a lot of the shift towards true financial freedom to DeFi. With the blockchain, Mr Everyday Joe is handed the tools needed to protect his finances from central control. 

It is worth noting that the space is still new enough to present challenges and risks. It’s difficult to say where the financial technology sector will take DeFi, but what we do know is that there is extraordinary potential in the space. With responsible research, so many can benefit from the ecosystem and we cannot wait to see where it can go.

January 29, 2024

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