Artificial Intelligence, Digital Currency, Blockchain, and Cybersecurity – these financial technologies have been taking the world by storm these past few years. And now, the concept of decentralized finance is also being introduced. With these various technological innovations, one can’t help but wonder how far these futuristic ideas will take us. But the real question is are we really ready for such huge changes?
Decentralized Finance: DeFi Concept and Financial Technology Explained
We’re now in the third generation of web technologies evolution. In this so-called Web 3.0, varying concepts, notions, and advancements are simultaneously brought in and set in motion. Several new technologies such as artificial intelligence (AI), machine learning, and blockchain are integrated into empowering machines, software, and modern virtual tools. And one of the latest focuses of Web 3.0 is the decentralization of certain platforms, including the finance landscape.
What is Financial Technology?
Financial Technology or FinTech refers to any new technology that aims to automate and streamline finance-related processes and services. This tech innovation focuses on exploring and advancing software algorithms and program codes that specialize in trading, banking, and all aspects of finance.
While FinTech was initially meant to help banks, entrepreneurs, and other financial establishments, this innovation has eventually evolved to also address consumer-related concerns and pain points. So aside from digitizing traditional banking, financial technologies are now also adopted in various other aspects such as financial education, retail banking, investment management, and even NGOs that handle fundraising events.
Recently, FinTech is integrated into the development and use of digital currencies such as Bitcoin. Here are some other fintech trends this 2022.
- Open Banking
- Unbanked Services
What is Decentralized Finance?
Decentralized Finance or DeFi is a financial system that removes intermediaries, making it more open and accessible to everyone – from merchants to businesses to consumers. It’s also more affordable since broker and bank fees are then eliminated as well. Since users are basically responsible for handling their assets and initiating transactions, they get rid of all excessive and unnecessary charges.
DeFi integrates blockchain and cryptocurrency technologies to process all required financial transactions. This emerging financial technology makes use of distributed ledgers to remove centralized institutions and third parties from the picture. It practices the concept of peer-to-peer networks, allowing direct processing of transactions.
The major components of various DeFi app developments include software, hardware, stablecoins, connectivity, strict security protocols, and public ledger. And by public ledger, we mean that this blockchain-based technology is handled by anyone who uses the same blockchain.
For instance, in traditional banking, your chosen bank gets to manage all finances you deposit into your account with them. They are responsible for recording and managing all your banking transactions. Whereas with DeFi, transactions are sent into the blockchain in the form of computer codes which will then be verified and processed by your fellow users. Each transaction is validated by solving complex math problems, and every verified transaction is a new block added to a chain of transactions, hence the term blockchain.
Smart Financial Technology Solutions: Why is the DeFi Concept Promising?
The core concepts of DeFi are decentralization and peer-to-peer (P2P). Using blockchain and decentralized applications (dApps), individuals get to efficiently transact with one another – from crypto exchange to loan needs to smart contract investments.
Here are some of the main reasons why several people – including tech giants and business tycoons – are hooked on this futuristic financial tech concept.
Accessibility and Freedom
Basically with access to a stable internet connection can access a DeFi platform or dApp. Plus, transactions could be executed without much complexity and requirements, as well as account limitations or geographic restrictions.
DeFi enables everyone to freely move capital anywhere across the globe. And since account owners hold the keys to their virtual finances, they can access them as they please, anytime and anywhere.
Visibility and Transparency
All DeFi transactions are submitted, verified, and sent back to their respective blockchains. This means that anyone who uses the same blockchain has access to all requested and verified transactions within the platform.
So unlike with banks, per se, you won’t know for sure what they do with your money. And in some investment organizations, their actual management of your finances isn’t as transparent as how DeFi does it.
Privacy and Anonymity
While everyone can see blockchain transactions, they won’t know which ones you process since DeFi converts data to computer codes that aren’t linkable to requesters or recipients.
The details of transactions are disclosed, but the owners’ information, or even IP address, isn’t divulged. Hence, privacy and security shouldn’t be an issue.
Cost-Efficient Banking and High-Interest Rates
By decentralizing the financial system, intermediaries and third parties would be gotten rid of, together with their service charges and “miscellaneous” fees. So transacting in a DeFi is a lot cheaper than the traditional financial system.
Plus, since all transactions are P2P, users can negotiate and agree to what works best for both parties. This gives limitless opportunities, especially to serious investors.
A Relatively New Concept: DeFi Loopholes and Risks to Watch Out For
We can’t deny the long list of benefits and advantages offered by this promising financial technology. But, of course, the DeFi concept isn’t flawless. After all, it’s relatively new.
Several government bodies started to implement certain rules and regulations to mitigate the risks of DeFi. But as an investor or an interested user, you must be privy to the potential risks and threats of this new platform.
Since no governing bodies or official institutions are managing DeFi transactions, users are less protected and secure. For example, bank users are entitled to up to $250,000 in reimbursements should the said bank fail. DeFi users, on the other hand, won’t have such insurance in case their transactions fail.
DeFi transactions are web-based. And since it’s basically a financial system based in cyberspace, it could be vulnerable to certain cyber threats and virtual risks. All parties heavily rely on online platforms and decentralized apps which could be susceptible to hacking.
With DeFi and cryptocurrency, assets are stored in e-wallets which can only be accessed by the owners. These digital wallets usually use private key requirements as part of their account security protocols. So once these private keys or unique codes are lost, users lose their funds as well as there are no possible ways of retrieving lost private keys.
Unlike traditional banking, decentralized finance is volatile since the value of digital assets often fluctuates due to various factors. And within a short span, you can lose all your assets as fast as you earn them if you aren’t careful and smart enough.
Conclusion: The Future of DeFi
Indeed, there’s no stopping DeFi, an emerging financial technology that’s currently stirring up the whole financial landscape. The independence, freedom, and convenience that DeFi offers are rapidly attracting users and investors from all over the world. But even with the various innovations and advancements, tech and finance experts believe that this fintech still has a long way to go. The security concerns, for one, would require tedious work to build relevant tools and aides.
Frequently Asked Questions
How can technology promote financial literacy?
FinTechs are no longer just used in helping financial institutions but also in educating all interested users. Tools and resources are now more accessible and comprehensive, enabling individuals to better understand and master how systems work.
Why decentralized finance tokens are skyrocketing today?
DeFi tokens don’t require intermediaries so these are way more affordable than buying bank stocks, per se. The freedom and independence easily convince users and as they flock to DeFi platforms, the demand rises, and the value of assets rises as well.
What are some popular decentralized finance companies?
Avalanche, Coinbase, Dapper Labs, Hashflow, Jeeves, KuCoin, Metamask, Nexus Mutual, Rarible, and Serum are some of the most popular decentralized finance companies in 2022.
Is it wise to invest now in decentralized finance stocks?
Moderate to high-risk investors would claim that today is the best time to invest while the market isn’t that mature yet. Just be sure though to do your homework first and do thorough research. Be sure you grasp how DeFi actually works.