DeFi - The good the bad and the ugly
Decentralised Finance is designed for the Internet age. DeFi is an open financial system. It provides you control and visibility over your money. DeFi exposes you to global markets with alternatives to your local currency and banking options. If you have an Internet connection can have access to DeFi products/services. DeFi applications deal with billions of dollars in crypto transactions every year. Transactions will only continue to grow.
The markets are always open. There is no centralised authority, so there is no blocking payments or denying you access to the service. Services are automatic and safer, free from human error and the code used can be inspected and scrutinised. The use of DeFi applications will continue to grow, for example, they are paying employees’ wages in real-time. People are taking out loans and paying back the loan, all without personal information.
Traditional Finance versus DeFi
- With traditional Finance, your money is held by a separate company. Therefore, you must trust that this company will not mismanage your money by investing it poorly. With DeFi, you will always maintain control over your cash.
- If you wish to use financial services, you need to apply for them. There is no personal information involved in using DeFi.
- You can not request information from financial institutions to see their loan history or a record of their managed assets. DeFi is transparent. You can inspect a product's data and see how it all works, and it is open to anyone.
- Due to the use of manual processes, transactions can take days. DeFi transactions take minutes.
Using DeFi allows large numbers of users from all over the world who may not trust one another to agree on a system of ledgers without using a trusted intermediary, cutting out the need for a middle man.
ing DeFi allows you to fund your ideas and borrow with or without collateral. Access stable currencies immediately, and move funds anywhere around the globe. The list grows as the market continues to evolve.
Is this a real concept?
Of course - It *is* the foundation of blockchain technologies and Bitcoin. It sounds crazy, people transferring money to each other without borders, without legislation, without rules - Minimal fees apply, and no one telling you what to do.
Sounds great right? Well, yes and no. The wild-west sounded romantic to some people but this was a dangerous time! We have endless exploits being targeted at blockchains with a focus on stealing Bitcoin - It truly is the wild west, and with Microsoft coining terms such as "cryware" for cryptocurrency wallet stealers, it feels like a certain amount of acknowledgement as to the seriousness of "crypto crime" is finally coming to the surface.
On the back end of this, some truly wonderful concepts have come from blockchain, web3.0, cryptocurrency and next-generation technologies in general. We must bear in mind these technologies are in their infancy and it will take some time for them to develop into their final evolved state.
So how can we make DeFi Safe?
Let's be realistic, in the same way, Oppenheimer didn't plan to make atomic bombs, Satoshi did not plan to make this "hackable" or to create a new criminal marketplace, in fact, the intentions were quite the opposite. Blockchain is safe and solid as a concept - In the same way, a car is safe and solid as a concept, it doesn't mean it cannot be modified into an armoured vehicle or the engine developed to make it so fast it is dangerous! It is often what we do with these technologies and how we adapt them to meet our own needs that can either open the can of worms or add security to make sure that can remains well and truly shut!
There are a lot of projects out there, some commercial, that offers adaptions of the blockchain to make solutions more safe and secure, Corda happens to be one of those (read more here).
So this is going to replace traditional finance?
Will DeFi replace traditional finance? Yes, I believe it will, just not in its current form. We have already seen submissions by Ripple (XRP) around such concepts and if the banks start adopting the technology then why not? If Corda pushes forward with their proposals, they have already added privacy and security in their blockchain implementation, the banks may adopt a similar approach, but then, how decentralised is that financial system or is it just Bank 2.0?
Realistically, we are building datacentres all around the world and there are more than enough datacentres within the world to house enough nodes for "regulated decentralised" finance but is this in line with the original concept of decentralised finance and an open book policy?
But are we solving a problem that doesn't exist?
Realistically, does anyone care about decentralised finance? Is there a real problem with centralised finance?
People will say "oh but my money isn't safe", "look at the people who have lost millions", "look at this case here where the banks did this". You hear horror stories all the time, but in reality, these horror stories often relate to people with large balances, who often knew the risks and are not "normally not the "average person". Let’s be honest, not all banks are created equal and when was the last time we heard a tabloid story about Coutts losing someone’s fortune – I think not my dear fellow; it wouldn’t be proper!
Regardless of your banker, in the United Kingdom, the FSCS covers compensation for each financial product they protect. The UK regulators, the Financial Conduct Authority and the Prudential Regulation Authority set the financial compensation limits and compensation rules which for the UK is up to £85,000 per eligible person (per bank, building society or credit union) or £170,000 for joint accounts and temporary balances up to £1 million for 6 months, which for most people, is more than enough to cover their current account!
Additionally, with "Faster Payments", I can send money quickly within the UK, and let's face facts, how many people regularly send abroad? If they do, it can all be done online now and arrives pretty quick these days!
The key things where it differs are "anonymity" and access to the inner workings of the system - Well, do I care that my bank has my details? It makes me feel more secure knowing I have this in place in some respects. Do I care how the bank pays my direct debits out? Not really, providing they don't fail to pay them!
>However, imagine living in a country where corruption is rife, and money is frequently stolen or "misplaced", maybe this is the technology for developing countries and isn't it part of our obligation to help others develop and be on the same platforms so that we can trade fairly? An even playing field for all.
In countries where having money or excess wealth can make you a target for governments or corrupt regimes, anonymity makes sense. In a perfect world, these problems don’t exist, but neither do cybercriminals or corrupt banks – As always “life finds a way” and we adapt to the environment we are placed in.
Additionally, if you are developing a new way of doing finance, why not put in the latest technology? The reason countries in the far east of Asia have such amazing connectivity is that they installed the latest technology first time. Due to the fact the UK has been adopting technology for so long, our telecoms infrastructure is older and more challenging to “upgrade” – It is easier to do a fresh install than an upgrade – Any IT guy will tell you that!
At the end of the day, DeFi is here to stay, whether it develops as it is, or whether it goes in another direction, no one really knows but Web3.0 will happen, and it will be on decentralised networks, and it will be using cryptocurrency – It already is! As such, this will have to be regulated, it will need governance and all the other bureaucracy before it is adopted fully – Let’s hope that another wonderful idea isn’t turned into a terrible mistake.