Imagining a Decentralized Global Financial System
The most viral ideas in crypto currently are those that center around the potential for cryptocurrency to transform the way we interact with the world economy.
I think most people who are not crypto native are not entirely sure what is at stake. They just see the stunning returns and subsequent crashes and wonder how this will ever relate to their lives.
This is an attempt at explaining what a completely decentralized global financial system of crypto assets might look like in the near future. (Current November 2022 Value 1.1 Trillion)
What would a Decentralized Global Financial system look like?
A decentralized system would likely look very different than now. For one, there would be no central authority controlling the flow of money. Instead, transactions would be processed and verified by a network of computers, making it much more difficult (if not impossible) for anyone to manipulate the system.
This would influence the way we interact with the economy. It would make it much easier for people to send and receive payments without having to go through a bank or other third party.
Potentially helping to reduce fees and make it easier for people to conduct business internationally by employing peer to peer network like the one you used to download movies on Pirate Bay (this works equally well when sending payments).
Another idea to imagine in a decentralized monetary system is that it would make it much more difficult for governments to censor who can and can’t have access to currencies. This could lead to more economic freedom and potentially help to reduce corrupt institutions like the federal reserve bank. Recall, that the US has prevented several countries (Russia, North Korea, Iran) from trading in their own native currencies on a global scale.
Decentralized Finance as a Revolutionary Banking System
The implications of using cryptocurrency to facilitate more efficient and secure transactions are enormous.
Cryptocurrency has the potential to revolutionize the way we conduct transactions by making them more efficient and secure. For one, cryptocurrency can be used to process payments much faster than traditional methods like credit cards or bank transfers. This could be beneficial for businesses that need to quickly and securely send payments to suppliers or customers.
In addition, cryptocurrency can also be used to create more secure transactions. This is because cryptocurrency transactions are verified and processed by a decentralized network of computers, making it much more difficult for someone to fraudulently alter or interfere with a transaction. Areas like online banking and shopping would be affected positively, where fraud is a major problem.
The Risks of Defi protocols to Traditional Finance
Although at the nascent stages of development, it is clear there are numerous issues with the adoption of a decentralized financial system.
There is a risk that Defi leads to the creation of a parallel financial system that is not subject to the same regulations as we have now. This could create a situation where people could use defi to avoid taxes or engage in other illegal activities in which consumer protection is nonexistent.
Money laundering. This is because it would be very difficult to track and trace transactions that take place on a decentralized network. Although, unlike centralized finance, blockchain technology provides a relatively easy means of tracking defi activity.
Generating a new anarchistic asset class that is not subject to the same rules and regulations as other asset classes. This could create a situation where people could invest in defi without understanding the full risks involved. ( hacks, and ponzinomics are weary thorns in the development of defi)
There is a risk that the value of defi could fluctuate rapidly. This is because the value of a cryptocurrency is based on supply and demand. If there is a sudden increase in demand for a particular cryptocurrency, the price could rise very quickly.
To mitigate these risks, the answer is a rather unappealing one but the greater the adoption, the less volatile the digital currencies become.
As funny as it sounds, if defi protocols continue to garner mass adoption, Bitcoin will one day change in value as little as the USD does on a daily basis.
There is a risk that defi could be hacked. This is because a young decentralized network is not as secure as an mature centralized network with adequate systems operational security (“sysops”). If someone was able to hack into the system, they could potentially steal people’s money.
It could simply fail. Defi is young, full of bugs and created by a young generation of developers who lack experience in the adversity life provides; they might simply be blind to the obstacles that will arise in the future.
Adopting Digital Assets
There are a number of potential benefits of adopting digital assets in the global financial system.
With only a glance at the technology behind digital assets, it is clear they have the potential to make transactions more efficient. They can be transferred and stored electronically, eliminating the need for paper documents. Second, digital assets can be used to create more secure transactions. As they are verified and processed by a decentralized network, it makes it much more difficult for someone to fraudulently alter or interfere with a transaction.
Third, they can reduce the cost of transactions by an astounding measure. This is because there is no need for a central authority to approve and process transactions.
Fourth, digital assets can be used to create new types of financial instruments. For example, they can be used to create smart contracts, which are self-executing contracts that can be used to automate the transfer of assets (think escrow by code instead of a trusted third-party intermediary).
What most in the developing world are already familiar with is the fifth reason. Their ability to facilitate cross-border payments for unbanked populations. This is because they can be transferred quickly and easily between different countries. For many, this traditionally has been a prohibitively costly endeavor in which a massive percentage of their minuscule wages is pilfered by the financial institutions set up more than 100 years ago. Looking at you Western Union!
How to Improve Centralized Financial Institutions without Destroying Them
As it’s not a certainty that the decentralized financial system will entirely replace its centralized version, it is better to envision how to improve the current framework and how eventually the two systems can comingle. At least in as much as the capital and financial services sectors are willing to adopt technology and a shift in mindset about the customer-banker relationship. Here are a few basic ideas that need to be maintained and encouraged as we transition.
One way to improve the traditional financial system is to improve the boundaries of regulation and make them more transparent and egalitarian. This could help to reduce some of the risks associated with digital assets and make the system more stable.
Increase transparency. This could help to make the system more efficient and reduce opportunities for corruption.
Expand access to financial services. This could help to make the system more inclusive and reduce inequality.
Broaden the scope of education and awareness. Another way to improve the traditional financial system is to improve education and the notion of financial responsibility. This could help to reduce misunderstandings and make lower-income financial transactions less predatory. Let all customers understand that their interest rate or margin trading is a double-edged sword they can use to their advantage or slice open their wrists with.
But let’s be frank, bankers are not going to let go without a fight, there is too much at stake.
Understanding the underlying technology in the defi ecosystem - What are the real benefits of a decentralized network?
First, it is much more difficult for someone to hack or interfere with a decentralized network. This is because there is no central point of failure that can be exploited (Elon Musks’ favorite expression,”attack vector”).
Second, a decentralized network is typically much faster and more efficient than a centralized network. This is because there is no need for a central authority to approve and process transactions.
Third, a decentralized network is more secure because it is not controlled by any one entity. This means that there is no single point of failure that can be exploited.
Fourth, a decentralized network is more resilient because it can continue to function even if some of the computers in the network are offline. This is because the network is not dependent on any central authority “mainframe” as they used to be called.
dApps - The Banking Products of Decentralized Finance
dApps are different from traditional financial products in a few key ways
dApps are decentralized, meaning they are not subject to the control of any one entity. This makes them more resistant to censorship and fraud. A dApp cannot cancel your bank account under any circumstances. They are not subject to censorship. You might have heard recently that Kayne West was kicked out of Jp Morgan for his anti-semetic comments. This simply cannot happen in a defi-driven system.
Defi platforms are often open source, meaning that anyone can audit the code to ensure that it is secure and functioning as intended. Imagine instant upgrades in the current banking app you use for Wells Fargo or Santander. Currently, it can take years for them to correct minor UX issues.
dApps used by public blockchain protocols like Ethereum and Solana are do not subject us to excessive identity verification rules. In dApps, this will be an instantaneous process, no need to wait for approval. It’s all in the code already. Anti-money laundering is a valid concern but a public ledger can be much more effective regulation than some draconian central authority.
In the defi system, earning real-time interest on your holdings or participating in decentralized exchanges without any gatekeeper is possible. Because the codebase is always updated in real time by the users themselves, there is no need to limit the time structure of transactions. That includes interest paid for participating in the network in real time.
Want to keep your money in an account for only a few hours or simply access capital for a temporary loan? You can still benefit from the current interest rates while you wait. This is an example of the flexibility of defi apps.
How Soon will Defi “Eat The World?”
Considering there is already more than 100 Billion dollars locked in liquidity pools and defi applications currently (also known as TVL), defi users are surely going to continue to grow no matter what the traditional financial sector does to block it.
The centralized financial system has been marked by defi developers as enemy number one.
Their business model is from a time when people had no choices, but with the help of Ethereum smart contracts and the satellite decentralized infrastructure are getting easier and easier to navigate. Soon you will no longer need to worry about the complexities of flash loans, private keys, and the jargon of peer to peer. You’ll simply open your smartphone and use one of 100s of decentralized applications just as you would your local bank app.
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