Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
The fiscal structure we have been using is centralised, which means that a central body, primarily a country's government, controls it heavily. This entire arrangement, however, is based on one fundamental premise of trustworthiness of the central body, and the assumption that it functions in the public interest, and is incorrupt - which we seldom see in the 21st century. Cryptocurrencies came about to resolve this issue by making the entire system of finances decentralized. Even so, it went through a lot of criticism and problems for the lack of regulations and the volatile nature. In order to overcome all these problems, technology experts came up with the genius idea of DeFi which combines the two.
What is Decentralized Finance
Decentralized Finance aka DeFi basically takes the best of the two - the conventional centralised financial system and decentralised cryptocurrencies like Bitcoin and Ethereum and offers a forum where small traditional financial applications can be built in a decentralised way. Many platforms for DeFi take the form of dApps or decentralised apps. Most of these applications are created on a blockchain platform like Ethereum which provides the option of building blockchain applications based on the same cryptocurrency. It is also possible to combine, alter, and incorporate applications that are built on one particular blockchain forum based on different requirements.
The technology behind
The technology that decentralized finance uses is called āblockchainā. In simple words, blockchain is a series of time-stamped āblocksā containing digital information, stored in a public database using cryptographic principles or āchainā. This information has 3 parts - information about a transaction, information about the participant of that transaction, and special information (hash) which distinguishes every single block from one another.
Characteristics of the technology of blockchain in Australia
Blockchain is a technology with immense potential. In fact, it is so powerful that within only 12 years of making an appearance, it has started to transform every industry completely, including finance. Here are the features of the technology:
Decentralized network: Blockchain ledgers are managed by a group of computers, acting on a peer-to-peer basis, all operating independently.
Distributed verification procedure: A "block" is checked by theoretically millions of computers spread across the network before being added to the "chain" for any single transaction to occur. So the data exists in many computers simultaneously, making hacking cumbersome as well as pointless.
Cryptographic Security: There is a public key for each member of a blockchain that is visible to all members of the network. The identity of the member shown in this data, however, is concealed by a special obfuscation called a "digital signature," which can only be deciphered by the owner himself with a personal private key, specific to him/her. This cryptographic protection of user access makes it almost impossible to hack identities and compromise details.
Immutability: Blockchain only supports "create" and "read" functionalities, meaning if data changes in one block, data changes in all subsequent blocks, and the entire network is notified, making information permanent once put into the ledger.
Data provenance: Only the owner itself can change the ownership of a digital asset registered on a blockchain. The sources of the properties are thus traceable and, consequently, verifiable and reusable.
Transparency: Each node point in a blockchain has a copy of all transactions' entire history, so all data exists simultaneously in different network locations. This decreases the chances of losing information.
So, what is so special about Decentralized Finance?
DeFi applications have the following characteristics in common, which put them ahead of any technology that has been being used in the financial sector:
Decentralized algorithm:Ā The interest rates and currencies in this system are defined by decentralized data and algorithms, by using the technology of blockchain in Australia.
Minimum human interference: Instead of human interaction to operate on financial and other types of transactions, DApps use smart contracts.
Open source coding: DeFi software coding is largely open-source, meaning that everyone can check it and verify its functionality, security and capabilities. As all users are informed at all times that the apps do not run any pernicious secret code in the background or steal any data without the knowledge of the user, the code is extremely secure and trustworthy.
Inclusive:Ā As an open-source platform, dApps are genuinely egalitarian, without any prejudice or even the influence created by the borders of countries. Anyone with a computing device and internet connection around the world can be part of the Decentralized Finance network. At the end of the day, the goal of DeFi is to build a completely borderless economy.
Permissionless:Ā Building or using a DeFi app requires no one's approval. This platform, therefore, relieves you of the significant number of regulatory verification systems that are needed for attaining inclusion in the global economy in the traditional financial system. For being so transparent and flexible, DeFi is also sometimes referred to as "open finance".
Flexibility in development: If a user wishes to add more functionalities to a dApp, he/she can securely incorporate third-party applications to it as needed, which gives developers more flexibility. What is even more interesting is that, if the existing choices are insufficient for them, users can create their own interfaces.
What does 2021 look like for Decentralized Finance?
Decentralized finance, being backed by the incredible technology of blockchain in Australia, has progressed a lot just within three years of coming into existence. There are a lot of dApps that are already gaining supreme popularity, like Synthetrix to create on-chain synthetic assets (Synths) that track the value of assets in the real world, crypto-based lending app YouHodler, and many more. With the emergence of a number of such successful DeFi apps, people have already started to realise the potential of the technology and the investment in the DeFi market has risen from $276 million in 2019 to nearly $11 billion by October 2020:
With the data at hand, tech experts predict the year 2021 to be the year of decentralized finance, with almost utter assurance.
Liquidating non-cash assets with decentralized finance:
In the centralized financial system that we have now, the only liquid asset is cash. This means the only asset we can invest, exchange, and buy new things with is cash. This poses a number of issues. For example, if you want to invest in real estate, you have to buy a whole house, by spending a lot of money in bulk. As this is a one or nothing situation, you get no returns unless the entire building can go for sale or renting purposes, and in fact, make a profit.
Decentralized finance is taking us back to the barter system before money came into the picture. In 2020, DeFi has created the baseline for liquifying every other physical commodity that you can possibly possess, like real estate, jewellery, art, collectibles, and many more.
How does it work?
In this system, a digital value is attached to all your assets, in other words, they get ātokenizedā. Then they can be added to the decentralised ledger of a network. Once a physical asset gets a number, it can be treated in an abstract way, and therefore, can be broken down into fractions, with each fraction having a lower value than the whole. Now, members of the blockchain network will be selling, lending, or investing the assets based on this digital value, and therefore, fractions of the property will be invested in, rather than the whole thing. So the stress of making profits on your asset also gets reduced into the fractions, and it all comes down to basic mathematical numbers game.
As we turn into more global citizens, this tokenization of assets is predicted to be a big thing in 2021. This new system makes the concept of investment more abstract as well as removes the intermediaries, so corruption in this field will reduce to a minimum. What is more, investing in big assets, the whole part of which is quite expensive, becomes much more affordable and hence, accessible to the commons, making the whole concept of investment extremely inclusive.
Lending and borrowing become decentralized
In a decentralised system, the principle of lending and borrowing remains the same as that of the current centralised system - users deposit their currencies just as they do now in banks, and when someone else borrows them, they will collect interest against their deposit. The difference lies in the liberty of investing in fractions rather than the whole, as explained in the previous point. More importantly, instead of some humans in the process making errors, taking a cut, or simply embezzling, completely automated, unbiased, and secured with blockchain in Australia, smart contracts, perform the verification procedures and decision-making for the conditions of the loan, the relationship between the lender and the borrower, along with the distribution of interest.
This one change in the system serves several purposes -
Transactions become quicker: Transactions in a decentralized system will be instantaneous as there will be no need to go through verification of documents or the encounters with a number of middle-men.
You get to choose your collaterals: Since this system of lending and borrowing is entirely based on digitized tokens, you can use any possession of yours as collateral, giving you a choice of keeping the more valuable assets like your residential property protected from an unfortunate financial disaster.
The flexibility of financial services increases: The fiscal system that we have been dealing with for so long is frigid and plenty of friction arises among different financial platforms because of this quality. In a DeFi system, all assets can be standardised with one digital value, which would help to achieve much greater interoperability of financial services across multiple providers and platforms.
Inclusivity, yet again: DeFi is liberal in its terms and conditions - it doesnāt require any credit check, or a series documentation, or identity verification multiple times. This will encourage a wide range of people to get into the business of borrowing and lending.
Borrowing becomes more democratic: As inclusivity increases, the number and variation of people getting into the business also increase. Naturally, the lenders will profit even more, but the common people will also enjoy a bigger share of profits.
Marketplaces and exchanges will become more open with decentralized finance: Decentralized finance will use the power of blockchain in Australia to create open marketplaces as well as exchanges. This means anyone who is in possession of an item that someone else values can directly exchange it peer-to-peer, using the digital tokens mentioned earlier. Electronic and electrical equipment, academic papers, collectibles, toys, basically these can be anything. There will be no separate registration of items, verification of users, or intermediary to take parts of your profit away; nor will there be any withdrawal fees. As all of this is taken care of secure blockchain-based smart contracts, the privacy of all the participants will also remain protected.
Prediction markets will become borderless with decentralized finance: Decentralized finance is completely open to everybody, without any discrimination, classification, or even order - practically anybody with a smart device and an internet connection can be a part of the community. With DeFi, the prediction market, betting and gambling will totally transform. Gambling is an area with a lot of constraints based on country-specific laws, availability of betting on a certain sport in a country, financial power, and many more. DeFi eliminates all segregation and any sport at any time can be bet on, without asking for the permission of anybody, by anyone from any corner of the planet.
Conclusion
In the 21st century, when we have seen so much injustice and unjustified inequality among the people in power, decentralised finance promises to give power back to the people by establishing a cost-effective, open and all-inclusive financial system. With this promise, we expect decentralized finance to only rise exponentially as the trend it has been showing for the past three years. Continuing like this, we hope for a purely borderless economy, bringing true equality among the people on this planet.
AuthorĀ Bio:Ā
Ralph Kalsi is an entrepreneur, blockchain enthusiast, and consultant who collaborates with businesses in Australia. With his vast knowledge and industry experience, he helps to drive sustainable business growth. He is the proud founder ofĀ Blockchain Australia.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.