The history of the traditional centralised Financial systems, which is the system that has central bodies like the Banks and Governments in control, can be traced to thousands and thousands of years back . The history of the oldest surviving bank can be traced back to 1472, and the history of governments controlling financial systems can be traced beyond eve ancient ‘Babylon’.
We have known no other way of using Financial services and products other than the centralised way, and we have no option but to follow and trust these central bodies with our hard earned cash.
We have very little influence or control with how the money is regulated by these institutions, and this has been very difficult for individuals who wish to innovate and change the traditional way of finance for many years.
Problems in the Centralised Finance System has seen a rise of FinTechs in the last two decades, but even the ‘successful’ FinTechs have had challenges in implementing their solutions and are still required to meet the requirements set and imposed by these bodies. Rightly so, regulation protects but it has also proven that it limits the full potential of what these FinTechs can do.
What if this was not the case? What if all this was not centralised? and What if we can build Financial systems outside these central bodies?
That is the concept DeFi is founded on. DeFi, as you may have already figured out stands for Decentralised Finance.
A vast majority of people have no or have little understand of what DeFi is, which is understandable, because unlike the traditional centralised Finance system that has been in place for many years, this concept is very new.
DeFi is the general term used for financial products and services accessible to anyone with an internet connection.
DeFi was created for one thing: to create a global and open alternative to the current financial system.
This is now being achieved by building Financial instruments in a decentralised architecture, on the blockchain and the backbone of the DeFi network is currently Ethereum.
With the internet, blockchain and crypto currencies, a financial system that is open to everyone has been created, allowing any user to build a customised financial system without the need for a ‘middle man’.
That is the beauty about DeFi.
Unlike what most people believe, It is completely transparent and everything happening on the block chain can be seen if one has access to the internet. A permanent transactions history is left on the blockchain, allowing anyone to easily track the movement of funds.
This action has further pushed the concept of the triple entry accounting system, which is another paradigm shift in the accounting industry.
The possibilities are endless with the DeFi system, by harnessing the efficiency and power of smart contracts (which are digital contracts that are created, issued and stored on the blockchain), DeFi platforms have created a space for that has seen the system being utilised for lending, borrowing, trading, saving, and earning interest which doesn’t require all of the usual bureaucracy and paperwork that follows these services in a centralised financial system.
The more businesses and individuals learn about it the more the new decentralised applications (dApps) will be created and implemented in the real word.
Every day the adoption and development of DeFi grows, and it will be great to see the next decade unfold with this new paradigm shift.
By Chomwa Shikati
I write about crypto, Fintechs and Finance | A Finance Leader (CFO) | Building in Africa and in Europe