Yerevan (CoinChapter.com) — Decentralized finance (DeFi) sounds like something from the future, where we all wear silver tracksuits. However, it has slipped into the lives of unsuspecting citizens, most of whom don’t know how it works. The most significant paradigm shift at the core of the concept is decentralization—the absence of a governing entity.
The idea of doing anything worthwhile without anyone in charge was unthinkable for centuries. Someone has to make the decisions and then take responsibility for the consequences. The concentration of power worked better in times when homo sapiens had to struggle to survive.
However, modern society puts much more emphasis on individual performance and responsibility. As a result, decentralization slowly crept its way into our brains, emotions, and lifestyles. We generally don’t abide by tribal rules of unbreakable hierarchy anymore in our day-to-day lives, especially in the developed world. With global events like abolition of slavery and adoption of democratic principles came individual changes.
The average middle-class urban homo sapiens in the developed world realized that financial matters could also be decentralized. The absence of a powerful entity like the banks, or governments, means DeFi is not prone to corruption and abuse of authority.
How does DeFi work?
Decentralized finance is built on unique algorithms known as Smart Contracts atop blockchains. If cryptocurrencies are perceived as ‘digital store value’ or ‘decentralized money,’ DeFi is the digital way of handling other financial transactions, like loans, saving plans, insurance, etc.
Each smart contract is a code stored inside a blockchain. Both parties agree upon the terms of the agreement. The algorithm itself governs the transaction instead of an institutional entity. No one person or company can change the algorithm of the network. And once agreed upon, the smart contract can’t be tampered with by either party. It is immutable. Moreover, all smart contracts are distributable. Finally, the participants on the network must validate each warranty.
Is DeFi the future?
There are different opinions on whether crypto in general and the DeFi segment, in particular, will be the future of finance. Alex Pack of the Dragonfly capital voiced his stance back in 2018.
The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way. You only get that shot every 50 years.said the CEO
Rick Falkvinge, the leader of the Swedish Pirate Party, was optimistic about the leading cryptocurrency, saying: “Bitcoin will do to banks what email did to the postal industry.”
However, some experts believe decentralization is not the answer to the flaws of the current system. Magda Wierzycka, the founder and CEO of Sygnia, a South Africa-based financial services company, was skeptical on the matter. In a podcast interview with John Perlman, she expressed her opinion on the future of crypto and DeFi. She asserted that for governments to accept the concept, they have to regulate the crypto market.
There are different perspectives to take when it comes to decentralization. The evolutionary and the sociological standpoints offer different views. However, decentralization in economics is here already. DeFi has revolutionized the way we think about financial systems and the necessity of control.
Experts often have opposite opinions on the future of the financial system. Both centralized and decentralized paradigms have advantages and flaws of their own.
Any innovation stems from a problem that needs a solution. The problem with the current financial system lies within the absence of trust. In a world where citizens have no confidence in the governing entity, they seek an alternate solution. Crypto and DeFi provide the answer, along with their own set of problems. However, DeFi is young, and time will tell if the solution is temporary or it is, in fact, here to stay.