If you’ve been reading the news, you must have heard “Blockchain is the future of finance” at least once. If you’ve ever wanted to know exactly what the blockchain ecosystem is doing to validate that claim, then this blog is just for you.
Now before we get into the supposed utopia that blockchain technology is claiming to build, let’s take a moment to understand how traditional finance really works.
Right now, I’m assuming that all your savings are in a bank account. That’s because banks keep your assets safe and also pay you a small interest. But have you ever wondered what the banks get out of it?
Well, here’s the truth.
A bank is a centralized entity that collects the funds of all the account holders, tracks their transactions, and uses the accumulated capital to provide loans at a high-interest rate, invest in lucrative opportunities, and also charge you a transaction fee whenever you use your funds for transactions.
So the reality is that your assets are not your own. They are governed by a centralized entity that uses them to advance its interests.
Sounds a bit unfair, right? But hey, can you even imagine living in the 21st century without banking solutions and existing financial tools?
For eons, the traditional financial ecosystem has allowed governments and banks to operate in a virtual monopoly.
A monopoly that got challenged by a whitepaper released in 2008 by Satoshi Nakamoto. The whitepaper of Bitcoin.
It marked the initiation of an ecosystem where you get the complete autonomy of owning your assets in a decentralized peer-to-peer ecosystem. If you’re new to blockchain and want to know how it works, I’d recommend reading this piece to get acquainted with the ecosystem.
Over the past few years, the world of DeFi (Decentralized Finance) has evolved exponentially. Developers from all walks of life have come together to leverage blockchain technology to build financial tools that not only provide you with complete financial autonomy but also operate with enhanced transparency, accountability, and usability.
Let’s explore how!
4 Ways Blockchain Technology is Revotionalizing TradeFi
Advanced security
Traditional financial instruments provide little to no transparency about the security protocols they use to safeguard your capital. And that is why, whenever there is a cyberattack or a data breach, you have nowhere to turn.
However, blockchain’s cryptographic technology introduces complete transparency and immutability, where nobody can alter the data and the system is impossible to manipulate.
This is because, in DeFi, individuals are responsible for processing payments without the requirement of any third-party data provider or transfer agent, making the transactions limited merely between two parties.
Seamless transactions
Assume you want to send money to someone in the United States. You don’t need me to tell you how complex the process is and how much of your capital is charged as transaction fees. In fact, even day-to-day transactions sometimes take a few hours or even days to settle. Not only this, but the process flows through various financial parties, which makes it inconvenient, slow, and expensive.
On the contrary, digital currencies like $BTC or $ETH (tokens of the Bitcoin and Ethereum blockchain networks) take a few seconds to transfer funds from your account to the recipient. It uses peer-to-peer technology to fulfill these transactions without going through any centralized entity.
And more importantly, blockchain technology operates without borders, localized restrictions, transaction fees, and limits on the funds you can transfer.
Blockchain’s distributed ledger also creates traceability and transparency on an immutable ledger so that users can quickly validate other users before sending the funds and avoid getting scammed.
Automation
The traditional financial ecosystem has a huge dependence on manual verification. If you have to claim money from an insurance company, your claim is verified by an insurance agent. If you want to apply for a loan, your credit is analyzed by a banking executive.
Smart contracts first introduced by Ethereum completely automate such processes. Smart contracts are programmable contracts on the blockchain network that self-execute tasks when the predetermined conditions are met.
For instance, after successfully validating a user, users with additional capital can provide loans. Similarly, insurance companies in the DeFi space can process the claims of respective clients automatically through smart contracts.
This makes the process more efficient and removes the scope of any manual clerical errors.
Interoperable data storage
Traditionally, every financial institute wants you to follow the KYC procedure so that they can store your data on their server for verification and prevent any fraud or money laundering.
However, you must pass through this verification process every time you want to open a new account in any financial institute.
However, in DeFi, you just have to follow the KYC procedure once, and your information gets stored on the network forever.
As the data is stored on a decentralized server, no one can interchange your information, and every time a company wants your information, they can use this KYC data, saving a lot of time and expense for both parties.
Conclusion
Given the infancy of the DeFi space, it would be careless to claim that it can completely replace traditional financial ecosystems.
However, the speed of innovation that is augmenting the growth of this space is certainly a step in the right direction. Since it’s an ecosystem that is built by and for the end user, it will only mature with increased adoption.
So if you’re curious about the kind of offerings provided by current DeFi projects, do peruse all the offerings on different blockchain networks at defillama.com