Is DeFi the financial revolution promised by Bitcoin?

The DeFi financial revolution, no matter how it develops in the future, will be an effective solution for the world's unbanked.

According to World Bank data released in 2018, 1.7 billion adults worldwide do not have a bank account.

This means that they have little access to financial services in the existing financial system.

Yet, at the same time, approximately 57% of the world’s population has access to the internet and 67% own a mobile communications device. Emerging fintech solutions, particularly the decentralized finance or DeFi movement, have the potential to bring financial services to this large unbanked population.

As people continue to realize the possibilities brought by DeFi, interest in DeFi by individuals and institutions continues to rise. According to Victoria Oslina, Google searches for the term "decentralized finance" surged 273% between 2018 and 2019.

Moreover, the industry has been constantly innovating and investing. To better understand the DeFi financial revolution, let’s discuss some of the fundamentals of DeFi.

As many believe, decentralized finance is the future of the financial system.

The DeFi financial revolution and the rise of open finance

The goal of DeFi is to build an open financial system instead of the existing centralized financial system. Broadly speaking, it is a peer-to-peer financial activity that does not require banks or other intermediaries.

To understand its relevance and how it emerged, we only need to consider the main problem of centralized finance. Intermediaries such as banks, payment gateways, loan companies, etc. drive traditional finance and have control over the financial system.

At the same time, centralized storage of financial data increases the risk of theft and encourages corruption.

Furthermore, fiat currencies are susceptible to inflation, which devalues ​​personal savings. To demonstrate this, think back to the countless scams and frauds in financial history, including the devastating market crash of 2008.

Driven by these factors, the core of the DeFi financial revolution is a decentralized solution based on blockchain, which has innovative value, can be applied, and can replace the centralized financial system.

In fact, on the surface, this seems to be the same promise that Bitcoin made in 2008. To address this issue, people often indulge in a heated debate between DeFi and Bitcoin, but in reality, this view is wrong.

Bitcoin is a decentralized storage and transfer of value, while DeFi encompasses a complete decentralized financial system: savings, transactions, loans, insurance, and more.

In fact, as pioneers in the development of DeFi, Ethereum, Bitcoin and some other blockchain platforms have made important contributions.

In many ways, Bitcoin was the pioneer, which then set off a chain reaction and the rise of decentralized finance. Bitcoin, followed by other cryptocurrencies, made payments possible for anyone with an internet-connected device.

Now, DeFi brings the entire financial system to these people, which is why we call it the DeFi financial revolution.

Decentralized Finance Operations

There are some obvious questions: How exactly does DeFi work? More importantly, how is it different from the traditional financial system? Let’s take a look.

Currently, Ethereum supports most DeFi applications because of its programmable smart contracts.

In short, a smart contract is a block of code that has specific predefined conditions that automatically start running and is used to develop decentralized applications or DApps.

The core of the DeFi ecosystem is composed of open source financial DApps, which allow users to create stablecoins, earn interest through cryptocurrency lending, asset swaps, and create new assets, etc.

However, despite the similarities in business scope, DeFi applications are significantly different from traditional banks or other financial institutions.

Self-Execution : Mathematical algorithms ensure compliance with rules without the need for human supervision. Although developers still need to maintain and update these applications, financial processes can run without any centralized governance.

Transparency : Since the code is on the public chain, every network member can audit it at will, and DeFi applications are highly transparent. This is completely opposite to traditional financial operations.

Global access : DeFi is globally accessible, regardless of location, and permissionless. Therefore, anyone can create and/or join an open-source DeFi application, thus avoiding the onboarding and red tape of centralized finance.

But these are just three of the most notable differences. With continued innovation, there will be more in the future.

Risks of DeFi Applications

As with any other application, there is always a chance of coding errors in DeFi applications . These, in turn, could become loopholes for hackers to attack user finances.

For example, in 2016, 3.6 million ETH, worth nearly $60 million at the time, was stolen in the infamous DAO hack.

Additionally, 2020’s Black Thursday — the stock market crash in March — challenged the stability of stablecoins, which are known for their stability.

Investors in MakerDAO, currently the most prominent DeFi platform, lost $83.25 million and filed a lawsuit against the company.

According to the lawsuit, the company intentionally misrepresented the risks associated with its ownership of CDP.

However, the fact is that even if these events trigger serious consequences, they cannot hinder the potential of the original rules.

First, in the face of such unfortunate events, immediate action is always taken to eliminate any future possibilities. Also, it is particularly important to remember that these systems are still in their infancy and are constantly being upgraded and made more powerful.

Decentralized Finance is the Future

Back to our original question: Has the DeFi financial revolution fulfilled the promise of Bitcoin?

Not only that, but it has also exceeded the imagination of the founder of Bitcoin. If Bitcoin is the sprout, then DeFi is the tree.

After 10 years of innovation, we can now use existing DeFi resources to revolutionize current financial technology. Of course, there are shortcomings, but it is a thunderbolt.

Ethereum and Bitcoin are also evolving. With the rising interest, the research and development of DeFi applications is also a hot topic.

Finally, the funds locked by major participants in the DeFi financial revolution, such as Maker, Compound, and Synthetix, are continuing to rise. In short, we firmly declare that decentralized finance is the future trend and will lead the financial revolution.

Could DeFi Be the Financial Revolution That Bitcoin Promised?