Introduction to Decentralized Finance
The world’s first-ever dedicated decentralized finance ETF is going to launch soon. This marks the beginning of a new industry that encompasses funds investing in crypto businesses or popular cryptocurrencies like bitcoin, Ethereum, etc.
This will allow the investors to track a basket of such securities that are decentralized, trading and lending networks that do not have any centralized authority, and also the decisions made are decided by a consensus.
So what are these Decentralised Finance Securities? In this article we will read more about the features and origin of Decentralised finance and how are they operated.
What is Decentralised Finance?
Decentralized Finance also called DeFi is an instrument that does not rely on intermediaries, brokerages, exchanges, or banks to be traded. Instead, it uses the technology of Smart Contracts developed on a blockchain. This technological instrument allows the users to lend or borrow funds peer-to-peer, speculation of derivatives, and price movements on assets like derivatives.
History and Origin of Decentralised Finance
The rise of cryptography and crypto-based assets is traced back to the 2008 paper of Satoshi Nakamoto that outlined peer-to-peer transaction mechanisms. A key milestone other than Bitcoin was the development of Ethereum and its crypto-asset Ether in 2017. This technology works on the development of smart contracts encoded with pre-determined protocols hosted on blockchains.
Key features and characteristics of the Decentralised Finance system
- Transparency: DeFi uses a layered architecture by composing building blocks using blockchain technology. This makes all the transactions publicly visible and tamper-proof.
- Decentralized: Every interaction between two or more parties is not overlooked on contracted via an intermediary like brokerages, banks, etc. These are done via the use of smart contracts. (Smart Contracts are self-executable pre-coded programs that have protocols mentioned which if triggered or broken can automatically execute the code. Hence eliminates the need for intermediaries that charge fees and the paperwork that slows down the processes.)
- Open for All: People from anywhere in the world are allowed to participate in this Financial system. This system is non-custodial and hence the investors have full rights over their assets.
- Pseudonymous: No investors are required to submit their names and details to transact in this system. The transactions are completely anonymous.
- Flexible and Fast: Assets transfer is allowed to anyone and anywhere without any permission, paperwork, or fees. This makes transactions extremely flexible and fast.
- Accessibility: You can access any Decentralised apps or platforms via your browser or application. Making it widely available for everyone.
The Future of Decentralised Finance
Decentralized Finance is just an idea or in its beginning stages of becoming a revolution. It is unregulated so the entire ecosystem exists with the possibility of hackers, mishaps, and scams. These can be the biggest points f cons for such a system.
Agreeably, the intermediaries and the central authority had a huge role to play in the Market Crash of 2007-09. The scams that went on by these intermediaries were to be blamed for the same.
However, without any regulation, the cases of fraud, hacks, and scams can cease to exist with much ease. Just like the way illegal activities are done easily on the dark web, decentralized finance can be easily questionable because of the ease it provides to such schemes. It can be so that they are actively being used for such arrangements even now, or the past few years since its launch.
The current ability of DeFi of conducting borderless transactions because of its peer-to-peer system and availability of its browser extensions from anywhere in the world makes it a very questionable source. Blackberry was famous for the security it provided on its mobile phones. Due to this, it was actively used for communication by a lot of illegal organizations and terrorist groups. Similarly, such extreme security and pseudonymity provided by the Decentralized Finance possess the same threat.
Other concerns also include carbon footprint, system stability and upgrades, energy requirements and consumption, system maintenance, and hardware or software failure. Many of such questions must be answered before decentralized finance becomes safe for use and widely adaptable. If Decentralized Finance is successful, then without a doubt intermediaries like the brokerages, banks and financial institutions will find a way into the system.
The goal of Decentralised finance is to create a financial system which is open, trustless, and permissionless. A lot of development and research has been put into the study and enhancement of the system. There is a lot of work going on to upgrade and improve the technology to make it as safe for use as possible. As this space is growing and developing, the aforementioned concerns should be reduced as much as possible for its global adoption.