Centralised Finance vs Decentralised Finance

For the past hundred years, economists have tried to decipher the human thought process. How we make decisions, behave under different circumstances and most importantly, how we associate value to things and institutions that facilitate our trade, like legal systems, corporations, marketplaces.

Today, we rely entirely on big intermediaries — middlemen like banks, government, big social media companies, credit card companies and so on — to establish trust in our economy. And these intermediaries perform all the business and transaction logic of every kind of commerce, from authentication, identification of people, through to clearing, settling and record keeping. And overall, they do a pretty good job. But there are growing problems.

To begin, they’re centralized. Which means they can be hacked, and increasingly are — JP Morgan, the US Federal Government, LinkedIn, Home Depot and others found that out the hard way. They exclude billions of people from the global economy, for example, people who do not have enough money to have a bank account.

They slow things down. It can take a second for an email to go around the world, but it can take days or weeks for money to move through the banking system across a city while taking a big chunk of about 10%. They capture our data, and that means we cannot monetize it or use it to improve our lives. Privacy now has become a term only found in dictionaries. To top it all off the 2008 financial crisis solidified that centralised financial system we have today is severely flawed. Starting in the United States, the Asian market just opened. The meltdown went on to drag all the markets with it. Today, further development in technology, we can lower uncertainty not just with political and economic institutions, like our banks, our corporations, our governments.

Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s a public registry of who owns what and who transacts what. The transactions are secured through cryptography. Over time that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgeable record of all of the transactions across this network.

The financial systems today are looped in such a way that people need to dig hard through unpronounceable words to understand the rather simple process. I mean, you tap your card in the corner store, and a bitstream goes through a dozen companies, each with their computer system, some of them being 1970s mainframes older than many of the people in this room, and three days later, a settlement occurs. Well, with a blockchain financial industry, there would be no settlement, because the payment and the settlement is the same activity, it’s just a change in the ledger.

Essentially, we are putting our traditional financial system of large institutions like banks to a movement that aims to create an open-source, permissionless, and transparent financial service ecosystem. It is done in an aim to fill the cracks in the age-old market systems. DeFi brings stable financial services to a larger section of the world population because of its scalability and trustworthy environment.

It strives to cut the middleman out of the tracks of stable cryptocurrencies. Ideally, most stablecoins have a bank account somewhere on the shores of a remote island and it puts in an equivalent amount (Aha? Do they do that?) of USD to the number of tokens generated. While certain successful DeFi ecosystems like Maker generate and destroy tokens as per the need of DAI to remain close to the true value of $1. It’s like the Feds buying back or adding to the supply to maintain stability and prevent hyperinflation. Think of the Maker system to be a continuous election. Decisions are made at every moment and are completely transparent because of the fully inspectable nature of the Ethereum Network.

DeFi aims to simplify traditional processes like managing transactions, generating and processing loan settlements or just building interest on the stored capital with smart contracts and secure systems for financial approval. A smart contract is an electronic algorithm for signing self-executing contracts on a blockchain. It describes an agreement in a mathematical language, which allows for eliminating differences in the interpretation of its terms and third-party interference into the process of its execution.

Every day a new project comes up with a very unique idea but a few aspects remain consistent through most DeFi ecosystems. One of them is governance tokens. To understand them, let’s look at MakerDAO’s MKR token. It’s like a check and balance system that governs the stability of DAI attempting to bring it as close to the true value as possible.

It’s a governance token that is used to pay fees on the loans token as DAI on the platform. Think of Maker to be like a voter’s ID. It is used for making policies on the platform regarding crucial issues like the interest rates, fees to be charges, collateral ratio required for loans and everything for the smooth functioning of the platform. The best fit to this would be exactly what the central banks of a country do. They are responsible for managing the interest rates, preventing over inflation and other nasty things. Only, in this case, we have a token to govern a system working as the central bank on the blockchain. Now there is this thing with banks that “they” can print money. Here ‘they’ are the one in power but in our future, we don’t want people/certain organizations to control the funds. Certain stablecoins have control over the funds, they create it. DAI can be created by ‘anyone’, yeah anyone. That means you and I can make our funds.

Looking at the current state of decentralised ecosystems, one would be glad the world hasn’t transitioned from the traditional systems. Today moving to an experimental system for the world is not feasible, yet we cannot turn a blind eye to the cracks in the traditional systems. Some remarkable projects fail to secure fundings and financial hurdles stop them from making the world a better place. We need the bigger players of the crypto space to step up and foster the growth of this emerging technology. Taking an example of OKEx who have consistently supported and collaborated with DeFi projects in every possible way.

OKEx recently listed COMP governance token of the Compound Finance platform. Inviting other exchanges towards DeFi, CEO of OKEx, Jay Hao said,

Such initiatives to improve blockchain governance and stability of the services offered, we surely can get into an ideal world with trustless, decentralized and secure platforms making our lives much easier.

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