A famous quote made by one of the biggest tech entrepreneurs in the world, Bill Gates, starts to become more and more of a reality. Bill Gates once said: “Banking is necessary, banks are not” referring to the fact that the middle man, which are the banks, are not necessary for a financial transaction between different parties. Banks currently function as the middle man who executes the transactions made by an organization or person, but banks are not accessible for everyone. Due to the big advancements in technologies and the endless possibilities of blockchain, banks could soon become obsolete.
DeFi, or decentralized finance, could be the next big thing to shake up the financial world. DeFi could be defined as “An ecosystem of financial applications and projects built on the blockchain technology” [1]. Advocates of DeFi state that this new financial system will reduce risks of fraud, corruption, and mismanagement of assets [2]. This is possible because it is secured by blockchain technology. With DeFi, transactions don’t have to be executed with the intervention of a middle man. Instead of a middle man, “smart contracts” are used to complete the transactions. Smart contracts are programs that run on the blockchain and are activated when certain conditions are met [3]. People can directly transfer money to each other without the intervention of a bank and it generated more transparency because no third party is involved and the encrypted records of the transaction are shared between all parties.
Currently, the Ethereum blockchain is providing an infrastructure for DeFi and is one of the most recognized parties [4]. But there are also some problems on the horizon. Lawmakers are not sure how to handle DeFi and legislation could prevent the growth of DeFi. Another problem with DeFi is the fact that it is slower than the current centralized systems [5].
In conclusion, DeFi could change the financial world forever but there are still some obstacles to overcome. Is DeFi becoming a reality or is blockchain a technology that will never fulfill its promise?
This blog gave a small introduction into the world of decentralized finance. Want to know more? Watch the video made by CNBC about the current state and future of DeFi: https://www.youtube.com/watch?v=_tXd9SC9xZw
By Stephan Bos
[1] https://www.youtube.com/watch?v=_tXd9SC9xZw
[2] https://gocardless.com/en-us/guides/posts/what-is-decentralized-finance/
[3] https://www.ibm.com/nl-en/topics/smart-contracts
[4] https://ethereum.org/en/defi/#how-defi-works
[5] https://www.eqifi.com/the-problems-with-defi-and-how-to-solve-them/
