Categories: Crypto, Finance, Tech

The Future of Decentralised Finance

Written by Nasr Ullah Khan on Sunday, January 26, 2020

Decentralised finance, also known as DeFi, is a monetary system built on public blockchains. It is a peer-to-peer financial system consisting of various projects that use cryptographic tokens and blockchains to issue, transfer and own financial instruments.

For a project to come under the umbrella of DeFi, it needs to possess the following characteristics:

a) The project must be under a state of disguised identity, such that true identities are not disclosed. Thus, DeFi apps should follow Web 3.0 standards for authentication procedures. This advantage of DeFi apps curtails the need for anti-money laundering or Know Your Customer (KYC) protocols to be followed.

b) DeFi projects should be permission less, i.e. anyone can create apps using DeFi without the need for approval from central authorities.

c) Dealing with tokens cannot be restricted to the people who maintain the network, hence giving DeFi the characteristic of being a set of public blockchains.

The rise of DeFi is one of the major trends in FinTech in 2019, and is set to be one of the top trends for 2020 as well. A reason for this is that DeFi possesses the ability to improve financial inclusion. Using DeFi, anyone with a smartphone and an internet connection could access financial services. Hence, a farmer in a developing country such as Pakistan will have the same access to financial services as a trader in London. This improved financial inclusion will occur due to the fall in remittance fees taken by intermediary firms and individuals.

With that, DeFi can also improve compliance and regulatory protocols in financial services. This is because DeFi runs across a series of public block chains, so each entity’s details would be secured through a private key. Hence, data breaches would be a lot less common in a DeFi system.

One can think of DeFi for financial services to be analogous to the internet for information. The problem is that such a movement of decentralised finance is a threat to traditional financial institutions. However, when the Internet was increasing in popularity during the late 90s, the newspaper industry was greatly threatened as a result. But it chose to innovate itself by introducing e-newspapers and email newsletters. This allowed the industry to not only survive the rise of the Internet but thrive throughout it as well.

We have seen traditional financial services adapt itself to rise in FinTech, through branchless banking and collaboration with FinTech start-ups (FinTech 2.0). Therefore, they would be able to respond to a rise in decentralised finance using a similar approach. This will not curtail the rise in DeFi, but we could see traditional financial institutions collaborating with DeFi projects. Such collaboration would enable the growth of DeFi and FinTech as an industry.

Therefore, the future of DeFi is bright.

Nasr Ullah Khan

About Nasr Ullah Khan

Student, UCL

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