Decentralized Finance – what is it and why does it matter?
Let’s start with where we are right now and that’s with Centralized Finance. Essentially every way we conduct a transaction is done through some sort of exchange where there is a “middleman”. This exists in banking, lending, trading, investing, and so on. The middleman or exchange maintains control over the system is responsible for security and assures settlement between the interested parties. This is the dominant way that banks, lenders, and brokerage firms operate currently.
Decentralized Finance is a system that aims to use technology (Blockchain and Smart Contracts) to eliminate the middleman or exchange allowing interested parties to interact directly. An example of “DeFi” would be users lending out crypto currencies like a traditional bank would lend dollars and earn interest as a lender.
This example is the base case and can grow into any of the traditional areas of centralized finance mentioned above.
Why should we care?
DeFi has the potential to reach many more people than Centralized Finance. With only an internet connection users who currently don’t have access to traditional exchanges will be able to trade and transact anywhere and at any time. With fewer intermediaries, DeFi has the ability lower costs and create additional flexibility.
DeFi is still only beginning to be adopted but we are going to be hearing a lot more about it in the days and years to come and could be instrumental in reshaping finance as we know it.
As the adoption of DeFi grows I will continue to update you and dive deeper on this topic.