Related Articles

An Overview of Decentralized Finance

BitForex Editor
Aug 25, 2020

Decentralized finance is a term used to label the variety of financial services and institutions offered and built on blockchain technology. Called DeFi for short, decentralized finance also refers to the ideological movement that promotes these forms of financial management. The main thrust of the movement is the autonomy and total control, that blockchain offers the individual, over personal assets, via its elimination of direct access held to personal funds by centralized authorities such as banks and the government.

The decentralized finance sector revolves mainly around cryptocurrency coins (e.g. Bitcoin and Ethereum) which provide a decentralized store of value that stands apart from any government-backed fiat currency. DeFi services are similar to traditional financial services except that they too are separate from traditional centralized institutions, such as insurance companies and banks, and make use of apps known as DApps (Decentralized Applications).

Compared to traditional finance, DeFi is still a small market, that said, it has seen rapid growth since its inception in the form of bitcoin by Satoshi Nakamoto in 2009, especially between 2019 to 2020. According to this article by British finance newspaper City FM, assets held in the decentralized finance system have risen from $275m in early 2019 to $4bn as of July 25, 2020.

What is special about DeFi?

Decentralized finance in its current manifestations gives the average individual more control of their money than current financial institutions allow. In the cryptocurrency system, all that exists is you and your crypto wallet. There are no banking officers or bank regulations dictating rules like minimum or maximum deposits and what not; the only thing holding you back is your ability to acquire assets whether via trading or other available means. This freedom is powered by blockchain technology.

What is Blockchain?

A blockchain network is a type of digital ledger wherein all connected devices have a copy of all the information held in the ledger. The block in the term refers to blocks of information, while the chain indicates that these blocks are linked like in a chain. Each block in the chain is composed of transaction histories (including the date and time of these transactions). For a transaction to be added to a block it must be verified, and this verification is carried out by a network of computers rather than an individual agent. This lack of control by anyone agent, or central authority, is what is meant by blockchain being a decentralized network.

A single block usually contains up to hundreds or even thousands of transactions and when full, it is given a hash (an algorithm that serves as an identifier and protection) and then added to the chain. Each block has two hashes: one hash belongs to the newly created block itself and the second hash belongs to the previous block in the chain, and so every block that is created contains an address to the information found in the previous block. For a hacker to permanently change information of a transaction that has already been carried out, he’d have to change the hash of all the subsequent blocks that will be added to the change, because they will all contain the original transaction information.

Advantages of Decentralized Finance over Centralized Finance

Autonomy

The money and assets that you own in a DeFi ecosystem belong solely to you and your alone. Due to the absence of a sole individual agent, no centralized authority, such as a bank, or the government, can carry out actions like freezing your account, seizing your assets, or blocking your transactions.

Accessibility

According to the global Findex report provided by the world bank, there are about 1.7 billion people in the world who have no access to bank accounts and thus are unable to enjoy the opportunities for investments that financial instruments provide.

Unfortunately, many centralized financial institutions are not incentivized to cater to this population. The expected remunerations don’t make sense compared to the capital necessary to target the unbanked and thus they are not regarded as worth it. All that’s required to access decentralized financial services however, are a smartphone and stable internet connection, making it much easier for the unbanked to have access to loans and other financial services.

Transparency

Courtesy of blockchain technology, DeFi data is publicly available to anyone part of the blockchain network, and this enables individuals to keep service providers honest. The information stored on a blockchain cannot be altered and since every transaction is stored with an attached timestamp, all the transactions of an institution like a DeFi bank can be tracked and reviewed.

Tokenization

Tokenization is the process by which real-world assets such as art and commodities are owned and traded on blockchain. Decentralized exchanges through which these trades are carried out are similar to traditional security exchanges, except that there are no middlemen such as stockbrokers or funds; users hold on to their funds at all times, and this helps to reduce the risk of cyberattacks.

Smart Contracts

Most DeFi applications allow the use of smart contracts. They are computer protocols that are programmed to automatically execute or document events according to the terms of a legally binding contract. This greatly increases the speed of collecting loans if all the requirements are met.

Disadvantages of Decentralized Finance and Currency

Crime

Decentralized finance provides anonymity and freedom. This trait makes them useful tools for financing and carrying out illegal transactions while dodging the necessary authorities. A good example of such occurrence is the digital black market “silk road,” which allowed the purchase of hard drugs using cryptocurrency.

Scale

Decentralized finance as a technology is still in its infancy in many ways and it is highly doubtful that many DApps will be able to handle a large customer base effectively, especially when compared to traditional finance services.

Volatility

Volatility is still one of the major issues cryptocurrencies face as their value is determined by the forces of demand and supply. The introduction of Stablecoins: cryptocurrencies that have their value pegged to an external resource (e.g. gold) have sought to address this issue, however major players in this field have not shown to be transparent about the commodities their stablecoins are tied to.

About BitForex:

BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.

BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

More details:

BitForex / Social Trading / CAPP Town

Scan to download for iOS or Android