In traditional financial systems, we have come to know and rely on central figures and authorities to control and regulate the activities of financial markets. While this has worked for a long time and continues to be effective, the global financial system is currently witnessing a change in the tide which can largely be attributed to recent technological advancements. It is these technological advancements that have made decentralized finance possible and we will get to how they do that in a bit, but first what exactly does decentralized finance mean?
What is decentralized finance?
Decentralized Finance (DeFi from here) is transforming the financial sector by providing an alternative to traditional, centrally-governed financial institutions (e.g. banks) that have always acted as financial intermediaries. A great definition of DeFi is this:
“DeFi is the movement that allows users to utilize financial services such as borrowing, lending, and trading without the need to rely on centralized entities.” — (Lau et al., 2020)
Essentially, you can think of DeFi as a system where there are no financial intermediaries between people who need financial services and those who can provide them.
How is DeFi able to achieve this, you might be wondering? Well, it’s now time to discuss those technological advancements we hinted at earlier.
How does it work?
DeFi functions as an open financial system because it runs on software that is built on top of a public blockchain. A blockchain is simply a system that offers secure and synchronized records of transactions. Whether it is a single transaction or multiple transactions, a blockchain allows records to be stored chronologically and transparently so that no part of the data (block) can be altered without the approval of all parties involved.
Public blockchains, such as Ethereum, are effectively transparent, decentralized, and require no permission for users to join and interact with each other. These are the attributes that make it suitable for building Decentralized Apps (also known as DApps) which facilitate the services offered within the DeFi system.
It is worth noting that cryptocurrencies similarly run on blockchains and can be traded within the DeFi system using DApps.
What are some advantages of DeFi?
DeFi is already transforming the way people interact with finance especially in the cryptocurrency space. The advantages include unhindered access to a wide range of financial services. Anyone in the world with a smart mobile device and an internet connection is a potential beneficiary of the financial services within the DeFi system. Services such as loans, insurance, saving, trading in cryptocurrencies, etc. are part of the services which can be accessed in DeFi.
Another advantage of DeFi is its transparency. Because the system operates on a public blockchain, every transaction is broadcast to and verified by other users on the network thus allowing for the data to be easily audited. It is also worth noting that the fact that data on DeFi is openly available to all users does not mean that it can be altered.
The DeFi system provides an unprecedented level of ownership and autonomy that we are yet to see in the traditional finance system. The absence of a central authority means that no one can block or revoke accounts thus allowing users to have full control over their assets. Additionally, the blockchain upon which DeFi is built cannot be shut down or altered by governments.
Delivering on the promise of ownership, DeFi is also set to transform how fund management works. The system allows investors to choose the asset management strategy that suits their financial needs and therefore reduces the costs associated with fund management. We are also seeing that the investment process can be automated so that investors do not have to do it themselves.
Why should you care about DeFi?
Years ago when we saw the rise in Bitcoin, some sceptics had reasonable doubts about its functionality and viability. However, as of today, 1BTC is worth over 50,000 U.S. Dollars thereby proving that it works, and it is indeed a viable currency.
Similarly, DeFi is set to revolutionize the global financial market as we know it and Kudy Financials is eager to get ahead of this new opportunity before the rest of the world catches on. We are still in the early days of DeFi and it is an entirely new asset, however, given our knowledge and experience with blockchain technology, we are looking forward to including it in the Kudy Trust Fund along with our other cryptocurrency assets.
As has always been the case, we will continue to rely on our prudent management policies, long term capital appreciation, and a combination of high yielding assets.
Please find the resources below to learn more about DeFi. We are also reachable via the Telegram Channel and email@example.com if you have questions.