Decentralized financing (commonly referred to as DeFi) is a blockchain-based form of financing that does not rely on central financial intermediaries such as brokers, exchanges or banks to offer traditional financial instruments, but instead uses blockchain smart contracts, the most common being Bitcoin and Ethereum.
Since the invention of banking, the global financial system has become increasingly centralised. There is no doubt that this has led to the creation of a huge amount of wealth for major players such as intergovernmental organisations, government regulations, massive financial institutions and central banks. Although banking is becoming almost universal in high-income economies, the rest of the world is still lagging behind. Fortunately, technological developments are making the time right for a new decentralized financial system to emerge.
There are six main features that distinguish public blockchains from private networks:
- Without permission: anyone in the world can connect to the web
- Decentralised: records are kept on thousands of computers simultaneously
- Without trust: a central party is not obliged to ensure that transactions are valid
- Transparent: All transactions are subject to public audit
- Resistant to censorship: the central party cannot invalidate user transactions
- Programmable: Developers can program business logic into low-cost financial services
With decentralised funding, anyone with an internet connection and a smartphone can access financial services. Plug and Play apps will allow people to intuitively use decentralised financial services without the complexity of a centralised system. It can remove costly middlemen to make remittance services more accessible to the global population. In the current system, it is prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees can be under 3%. Also, transactions are immutable and blockchains cannot be shut down by central institutions such as governments, central banks or large corporations.
Public blockchains could interact with the traditional financial system to create a new financial model where users can conduct economic activity on public blockchains and exchange their new wealth in the centralized system and hedge against systemic risk by diversifying their holdings across the central and decentralized system .