How decentralized finance will change the economic landscape - Jenco Tech

 

In the past years, the global economy has made significant steps. The increasing number of technology users and the global Gross Domestic Products is at its highest point since 2015. Amidst this economic growth the world has been experiencing, most people would expect that the traditional financial institutions will steal the spotlight. Unfortunately, due to continued operation barriers, this progress is obstructed.

Because of this heightened globalization and technological advancement, society is entering a new stage of global consciousness. This consciousness includes individuals’ empowerment to ask more of the financial entities that they trust with their assets. The growing technological accessibility has opened up the obstacles preventing most of the population from participating in the global economy and capital markets. As a result, many are starting to reject the costly and time-intensive financial systems that have long impeded economic progress.

Since users are gaining increased access to their financial information, many are beginning to be more protective of their assets and expect that centralized institutions to be more responsible for their actions. Thankfully, blockchain technology offers tons of solutions to applications in the finance industry. Experts believe that it can shift the current financial system’s paradigm through its innovative technology, decentralized finance (DeFi). DeFi is set to eradicate many flaws of the current economic system and promises to bring the financial system to the unbanked and the underbanked to enjoy financial services in the future.

Understanding decentralized finance

According to a study published in the Stevens Institute of Technology School of Business Research Paper, “in the financial industry, blockchain technology allows for the rise of decentralized financial services that may be more decentralized, innovative, interoperable, borderless, and transparent. Decentralized financial services have the potential to reduce transaction costs, broaden financial inclusion, facilitate open access, encourage permissionless innovation, and create new opportunities for entrepreneurs and innovators.”

With the current traditional centralized finance, we are experiencing high transaction fees and restricted access to some services, especially in developing countries. With DeFi, everyone can now experience lower transaction costs — whether remittance or service fees — and borderless, transparent financial services that were only available to the affluent class.

Every country has its various financial services, including loans, savings, insurance, and investment. Decentralized finance means creating a global alternative to these financial services that were once restrictive. Anyone who has access to the internet and owns a smartphone can be part of the financial services DeFi offers. The main objective of the innovative system is to draw the 1.7 billion unbanked population into the global economic system to contribute to the world economy.

Decentralized finance versus traditional finance

According to an analysis report by Jenco, a decentralized financial service platform, “traditional finance uses a centralized authority that maintains distinct currency values across nations. Banks and other financial institutions enable monetary transactions using uniform values that may change, depending on the present GDP of the different nations whose currencies are used in particular exchanges.”

“For instance, if the current exchange rate is 1 USD is 0.76 GBP, then all monetary exchanges are based on this present value. Currency values change depending on the time frame and location,” says the same report.

Apart from maintaining the distinct currency values across countries, it also works as a restricted medium. This type of financial system uses banks and intermediaries to perform a single transaction. This means that the whole process in this system takes time, where some of it takes days to execute, and it is also costly. Almost every transaction has a service charge attached to it.

“In contrast to the traditional financial sector, DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocol and decentralized applications (DApps),” says a study published in the University of Basel. When it comes to decentralized finance, there are no mediators involved. Since there are no intermediaries to charge for fees, transactions can occur within seconds, through smart contracts, and are free.

Most importantly, decentralized finance is secure and transparent. Unlike other centralized financial services, this system has no hidden costs involved. That’s why it is set to increase the competitiveness of the financial systems in the world.