Decentralized Finance (DeFi) is a decentralized alternative to conventional finance that operates without mutual trust among market participants.
Free from intermediaries
Almost all processes in the financial system are controlled and regulated by central institutions. When granting a loan, taking out insurance or investing capital, the path for the end customer always leads through intermediaries, which are not only associated with costs, but also with time delays and not infrequently a lack of transparency. The blockchain-based applications of the Decentralized Finance sector are transferring many core processes of the financial sector to the peer-to-peer world.
"Sound money and free banking are not impossible; they are merely illegal. Freedom of money and freedom of banking are the principles that must guide our steps."
Open and decentralized
Successful app-based payment systems and crowdlending platforms already exist today. What they all have in common, however, are centralized structures that entail costs and risks. In the financial system, in addition to general default risks, imposed controls and restrictions on access to one's own assets, up to and including expropriation, are among the dangers to be taken seriously.
In the decentralized world, on the other hand, there are no access restrictions for either service providers or users. Opening an account, executing transactions or even developing and launching one's own financial application do not require any legitimation. The transfer of assets is global and independent of country borders. Users have access to their assets at any time, and trading platforms and settlement processes run automatically around the clock.
Decentralized Finance applications are open to everyone. They give users direct access to processes such as granting or taking out loans or acquiring investments. At the same time, they protect against arbitrary access to assets.
"All significant breakthroughs are break -“withs” old ways of thinking."
The process steps in the conventional financial world are largely standardized. Cryptoassets offer a high degree of flexibility via the free programmability of all processes. This programmability of digital tokens is what makes the diversity of applications possible in the first place, as can be observed in the Decentralized Finance sector.
Crypto assets dissolve the once clear boundaries between currencies and assets. With programmable tokens, the functioning of the conventional financial sector can not only be mapped but significantly expanded. This opens up numerous new opportunities, especially in the area of capital investment.
"As each asset class goes on-chain, it can be stored in a digital wallet. And it can be traded against other such assets. We're about to enter an age of global monetary competition."
Decentralized finance applications are based on blockchains. Compared to the systems of the conventional financial system, they have a completely different structure. This applies to both the processing of transactions and their historization. Transactions between two conventional bank accounts are processed and tracked in the systems of the institutions involved.
Decentralized financial processes use a decentralized and public general ledger implemented on a blockchain. The maintenance of a public ledger of all transactions ever executed enables an ongoing audit of the entire history. Data is stored redundantly on all computers in the decentralized network, making it extremely robust.
"After just five years, the Crypto Financial System offers fundraising, trading, lending, derivatives, payments, contracts, insurance. Its solutions are trustless, global, extensible, and 24/7."
Many Decentralized Finance applications are still in the development phase. Due to the high growth dynamic, new applications are being created on a daily basis, turning investors into beta testers, especially in the start-up phase.
The downside of the finality of transactions and the unbureaucratic and fast processing of transactions is the lack of consumer protection. Those who use these applications act fully on their own responsibility. Reversal of transactions is impossible, as is arbitration of disputes by third parties. There is no deposit insurance.
The positive side of personal responsibility and thus one of the reasons for the success of decentralized applications is obvious. Users are liable for their own mistakes, but not for the mistakes of others. There are no bail-outs or other types of socialization of losses.
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much."