5 Features of Decentralised Finance That changes the Way You Think About Money

5 Features of Decentralised Finance That changes the Way You Think About Money

Did you know the financial system of the world is likely to undergo a complete turnaround?

Decentralised finance has taken the world by storm. It’s a rapidly growing field that has already attracted over $78 billion as of Feb 2022.

The rules of DeFi are different from the traditional financial system. Today’s system has been the same since perhaps the industrial revolution! This means that everything you know about money, the way you transact, save, invest and everything else is about to change.

So here are 5 features of DeFi you cannot afford to ignore.

1. Has no central authority

The current financial system requires that every single person and financial institution trust the central bank of the nation. The money supply of the nation, interest rates, inflation, and exchange rates are all controlled by the central bank.

The downside of this: central banks can make drastic mistakes by misreading the situation. They can also become corrupt or sway to the wishes of politicians. This can lead to great crises like the 2007 Great Recession.

DeFi serves to resolve all the flaws in the current system. So, instead of a trust-based system, DeFi works on clever algorithms that are tamper-evident and can’t be manipulated. So money can’t be printed at a whim.

Likewise, no central authority can tweak the system according to the wishes of corrupt officials. The process is delivered from human biases and errors. Blockchain takes care of everything.

This is the main feature and advantage of DeFi.

2. Transparency

If you’re familiar with blockchain technology, you’ll know that blockchains are completely transparent. Every single transaction that happens is recorded on a ledger that can be accessed by anyone who comes aboard the blockchain.

Prior to the 2007 financial crisis, banks did something very innovative with the loans they were giving away. They bundled the loans together and traded them with each other and other financial institutions like how you’d trade stocks!

This process required a complex set of accounting procedures that during the crisis even the Federal Reserve couldn’t trace back the transactions!

Such a thing can never happen with a blockchain. This makes it easy to trace transactions, manage assets and also prevent frauds and scams.

3. Needs no middlemen

In the current system, all transactions have to happen through banks or other financial technology companies like PayPal etc.

The problem with this: for every transaction you do, you have to pay the middleman. The money given away as fees in these transactions contribute to the profits of these middlemen. Large banks like JP Morgan or Bank of America make profits off the order of tens of billions of dollars. These are very large sums of money.

But with blockchain, you can directly transfer money to anyone in any part of the world without a need for a payment interface or a bank.

You can also make loans on the blockchain. You enter the criteria you have for lending your money and the algorithm will show a list of people who are willing to meet your conditions. You can give your money to them directly without having a bank do the job for you. The end result, you earn a lot more in interest income.

It works the same with borrowing. If you want to borrow you just need to search for people who are making loans according to your requirements and take money directly from them.

And since all the transactions are peer-to-peer, you don’t need to wait for several days for banks to process your request. It happens instantly the moment you click your mouse. It’s super-fast and super easy.

So you can see, DeFi is much cheaper and faster.

4. It belongs to everyone

Banks and other financial technology companies exert great control over the financial system. Hence they limit ease of use and deter innovations that would serve as a threat to their business goals.

But DeFi isn’t controlled by anyone. Anyone with an internet connection can hop into it and start transacting.

As more and more people get on the blockchain there will be more innovations coming in with new ways of dealing with money, investing and even earning.

This is one of the primary reasons why you should look at DeFi seriously.

In recent years, there have been numerous innovations in the financial system spearheaded by technology firms. Hence the name fintech. However, none of these tried to change the foundational principles of how the system worked. They just built computer programmes that made existing tasks simpler and quicker.

But DeFi is different. It completely replaces human trust with trust in maths and technology. It is a trustless system! It hits at the building blocks of the financial system. And when this becomes mainstream, the world will look radically different.

5. Endless possibilities

We know that computer programming has opened up the possibility of integrating different parts of a system. So, when the entire financial system is built on computers the scope to integrate different kinds of assets or transactions becomes a reality.

Thus, new financial services can be and will be created. For example, new kinds of loan-making and futures markets can be integrated together! A wild thought!

Also, fund managers can get on the blockchain and play with a whole new range of assets and investment options making great profits. The possibilities are endless.

DeFi is surely the direction the world will take. Initially, only the computer nerds were getting into it. Now it is starting to get adopted the world over at a rapid pace.

If you’re looking at investing and making your money, especially for the long term, you cannot afford to ignore DeFi anymore.

So, don’t wait. Understand what the future is going to be and start preparing for it. Go and check out our other blogs for more information on how to invest and also be ready for the future.