How is blockchain influencing the decentralized finance model?
Blockchain is highly considered the most revolutionary and advanced technology. It provides a secure and transparent network and records information that is visible to everyone but can be used by those who have access. Also referred to as distributed ledger technology, blockchain today has moved beyond the sole focus of cryptocurrencies to a broad array of applications. This technology is now increasingly being used in the financial services industry, enabling the rise of decentralized finance. This financial model can support financial inclusion, lending, insurance, and pave new opportunities in the industry.
As financial institutions play a crucial role in mediating and structuring financial transactions, blockchain eliminates the need for intermediaries in such transactions. It significantly facilitates transactions through decentralized networks, improving the security, transparency and efficiency of peer-to-peer transactions.
Why Decentralized Finance?
Decentralized finance emerges as an open-source and transparent financial service ecosystem that is accessible to everyone and operates without any central authority. It enables easy access to financial services and connects people who are inaccessible from the current financial ecosystem. It has a modular framework built upon blockchain technology that can develop whole new financial products, markets, and services. Unlike a centralized financial system where financial institutions mediate and control financial transactions, decentralized finance allows transactions through decentralized peer-to-peer networks instead of centralized institutions.
Decentralized finance runs on the blockchain protocol of Ethereum. It is highly decentralized and readily accessible to anyone interested in developing or using a DeFi app. Decentralized finance also enables open, decentralized borrowing and lending that delivers substantial advantages over the traditional credit system. It facilitates immediate transaction settlement, the ability to collateralize digital assets, no credit checks, and further potential standardization in the industry.
Blockchain Disruption in Decentralized Finance
The DeFi model is significantly built on blockchain technology and open standards that bolster interoperability across distinct financial services. The greater interoperability enables a seamless flow of financial capital and value across diverse services and borders, significantly creating value.
There is a greater focus on the creation of cryptocurrencies such as stablecoins, as blockchain technology is maturing. As the price of cryptocurrencies is fluctuating rapidly, decentralized digital currencies could be adopted for everyday use as these currencies are not issued and monitored by a central authority. Moreover, the process of getting a mortgage is expensive and time-intensive citing the reason of intermediaries. Thus, blockchain here can help reduce underwriting and legal fees significantly with the use of smart contracts. Smart contracts are transaction protocols stored on a blockchain and automatically executes when predetermined terms and conditions are met.
Most decentralized finance apps encompass the development and execution of smart contracts. As a common contract defines the relationship between the entities entering the contract using the legal terminology, smart contracts are typically written in computer code and demonstrate different abilities to fulfill the terms by applying computer code.
The decentralized finance model promises huge benefits to customers and investors. It can democratize banking and finance by ensuring easy access to financial services for everyone.