Steemit Crypto Academy Contest / S1W3 – Blockchain Through The Concepts by @bukkyi4u
Edited with imarkup
It's a great pleasure and a wonderful opportunity participating in Week Three of the Steemit Engagement Challenge on the Steemit Crypto Academy. One of the most interesting concepts that appeal to me in the blockchain industry is decentralized finance (DeFi). I wish to analyse this concept in the succeeding sections.
Tell us about your favorite concept or term related to blockchain, try to be explanatory and make sure to give your opinion.
Decentralized Finance (DeFi) is a type of financial technology that is becoming popular which relies on the use of distributed ledgers just like is equally obtainable in cryptocurrencies. It achieves the major aim and important feature of eliminating control institutions and banks. This means that in decentralised finance banks and financial institutions do not have control over financial services, financial products and money as is witnessed in traditional or centralised systems of financial control.
Some of the things that makes DeFi attractive to many users include:-
- It ensures that financial services are obtained without the fees that would have come with it if they were to be offered by banks or other financial institutions in the traditional financial system
- You do not have to keep your money in any bank, instead you can have custody of it in a digital wallet which is very secure
- You can access the financial services offered with a simple internet connection and you do not need the approval of anyone before doing so. This means you don't have to go through any bureaucratic protocols or processing of document in order to access financial services unlike in the traditional financial system
- The transfer of funds in this financial system can occur in just a matter of minutes or even seconds
Understanding The World Of DeFi
Before we can understand the functionality of decentralized finance and how it really works it is necessary for us to have a good understanding of how it differs from Centralised Finance (CeFi).
Centralized Finance
In the world of centralised finance you keep your money in the custody of banks and other corporations that have the aim of making more money from it. In the centralised financial system third parties are required to facilitate the movement of money from one party to another and thereby charge exorbitant transaction fees in the process of offering their services to you.
As an example, assuming you had to pay for a gallon of or you by making use of your credit card, the charge would be processed by the bank through the merchant. The card details are also submitted to the network of the credit card from the bank. It is then cleared by the network which also makes a request to receive payment from the bank. The approval for the charge to be deducted is made by your bank which broadcasts this to the network. This broadcasting action goes from the acquiring bank and returns to the merchant.
Along this chain of business activity, each service provider receives a payment for his own services rendered. Every single financial transaction in this traditional centralised system cost a lot of money. Loan applications cost money and can take several days before they are even approved not to talk of arriving. Some other times, your physical presence must be required before certain transactions are approved or carried out.
Decentralized Finance (DeFi)
Decentralized Finance (DeFi) removes the services of third parties or intermediaries and makes it possible for merchants, people and businesses to carry out financial transactions with the use of emerging technology. This is done through a peer-to-peer network that provides financial services while making use of software, connectivity, security protocols and advanced hardwares.
As soon as you have an internet connection you can perform transactions like borrowing lending trading from anywhere by the use of softwares that records and implements steps to verify financial transactions through a distributed database of financial records. This distributed database can be accessed from any location at all. Usually, data are collected and aggregated from all the independent users of the network by a means known as consensus mechanism which is used to verify such data.
So, the decentralized finance network or technology is used to remove all financial models that would have existed in the centralised finance system this makes it possible for anyone to access such financial services from anywhere at all without the need for such intermediaries. There are DeFi applications that grant its users the control of their money and resources which would usually be kept in their personal wallet. Trading activities can be done from such places by the individuals or users.
Why do you think it is important in the blockchain?
Copyright free image from pixabay
There are so many reasons why I believe that decentralized finance is of so much benefit and importance to the world of blockchain. The concept makes use of the key principles that were deployed in the Ethereum blockchain in order to increase financial transparency, security, support growth opportunities in blockchain and unlock large amounts of liquidity as well as promoting a standardized system of economic operations.
Some of the importance of decentralized finance to the blockchain industry include:-
It makes it possible for smart contract that can be highly programmed to be deployed in the automation of the processes deployed in the new or digital assets creation
It makes it possible for data that cannot be tampered with to be created be by leveraging and architecture of auditable and decentralized network which increases security
It makes it possible for applications built on different DeFi protocols to be integrated in such a way that they can complement one another and interact with one another and come with customisable user interfaces.
It makes permissionlessness a possibility in which case it can be accessed at anytime or anywhere with just an internet connection and you may not have benchmark in the form of minimum amount of assets you must possess before interacting with most dapps
Usually, decentralized finance involves the use of applications that are interacted with over blockchain industry that fills the broadcast of transactions to the entire network and its verification by other users bringing about a high level of transparency.
These are some of the benefits and importance of decentralized finance to the blockchain industry.
Do you think that the existence of the blockchain would be possible without this concept? Is there an alternative or similar term?
Copyright free image from pixabay
Actually, not all aspects of blockchain industry involves decentralized finance projects. So, blockchain can exist without decentralized finance but decentralized finance cannot exist without blockchain. Blockchain which is a network of nodes that are distributed across various ledgers can host a lot of different other products or projects that can include non-fungible tokens, gaming consoles,etc.
However, decentralized finance cannot stand on its own as it is an integral part of the blockchain industry. It depends on the concept and structure of distributed ledger and nodes to operate. Hence, its products can be hosted in various available blockchains.
Decentralized finance is also an all-encompassing term that incorporates and integrates various services and projects that enable users to carry out financial transactions and obtain financial services over the blockchain industry without any need for third parties or intermediaries. This means that at present there is no alternative to this as it touches on decentralization which is the central concept of the blockchain technology itself. The only other alternative is in the traditional or centralised financial system which is the very opposite of DeFi.
Do you think it is possible to improve this term in some way? Explain us how.
Copyright free image from pixabay
Whether or not the concept of decentralized finance can be improved depends on the shortcomings that may have been perceived. There are indeed quite a number of shortcomings of decentralised finance that can be addressed to improve it.
In a situation whereby a particular blockchain where DeFi projects are hosted suffer from unstable conditions then the project will also be affected and this leaves the projects at the mercy of the underlying blockchains. A great way to resolve this is to ensure that any blockchain where DeFi projects are hosted must be highly stable.
Most blockchains where DeFi projects are hosted are highly inscalable meaning that transactions stay for too long before being confirmed while also being expensive due to congestion. Therefore, the scalability of DeFi blockchains should be greatly improved in order to ensure that DeFi products enjoy same.
If any form of flaws is discovered in any smart contract that hosts a DeFi project it could lead to loss of assets. So, to improve DeFi projects, developers should ensure cat the software codes of smart contracts that host them do not contain any form of errors.
Another great aspect that need to be addressed is that of liquidity in the decentralized finance ecosystem which boastsjust about $12.5 billion total value locked (TVL) in October 2020 and this is nothing when compared to the available liquidity in centralised finance institutions. This would not be enough to meet the demand it could get and needs great improvement.
CONCLUSION
The blockchain industry is a great project and invention which comes with the central concept of decentralization in which different nodes are connected in a system of distributed ledger technology for the purpose of sharing information and common resources without having to need the interference of third parties or intermediaries.
Decentralized finance is one of the integral aspect of blockchain technology which makes it possible for financial services to be carried out by users without needing intermediaries to interfere in the process. This eliminates the high fees charged by such centralised financial institutions as banks and corporate bodies. It equally improves the ease of doing business as services can be accessed remotely with almost no benchmark on financial engagement when carrying out such transactions.
I think Centralized and Decentralized are equally needed by cryptocurrency users, you explain in detail and clearly.
Actually, there are some ways that centralised systems can still benefit crypto. What decentralized finance has been a total shift from its traditional counterpart but lacks the needed liquidity - at present - to meet the potential demands.
The innovative ways decentralized finance corrects and handles most of the anomalies including exorbitant transaction fees witnessed with centralised finance are quite appreciable. However, I would still like to note that a lot needs to be done in terms of liquidity to make it a huge success.
Decentralized finance is a huge part of the blockchain I appreciate so much due to the fact that it helps eliminate parasitic third parties or intermediaries always waiting at every point of financial services or transactions to milk users of their hard-earned currencies
There are a lot of limitations to centralised finance and it is interesting to note that most of these are handled or corrected by the decentralized finance
The fact that decentralised finance operates with blockchain technology is an interesting reality because this would make it leverage the benefits of blockchain such as trustlessness and even immutability
One other aspect I appreciate so much about decentralized finances that you remain in custody of your phones and you can access it from any remote location at all with just an internet service