Why DeFi?
You've lived your life so far with access to the current traditional financial services, and more or less it's all been good, so why switch to DeFi? Here's why.
Decentralised Finance is an extremely young and immature industry with heaps of potential. The entire industry started with the development of smart contract technology on the Ethereum blockchain in 2015. Smart contracts (for those who don’t know) are basically a of code that allows two parties to automatically execute transactions without the need of a third party as all the conditions for the transaction are coded into the contract. This technology created the concept of trustless and permissionless finance. The first protocol to make actual use of this technology was MakerDAO. They created a stablecoin based lending platform where they used their native stablecoin DAI. The project was launched in 2017 after 2 years in development and since then the DeFi ecosystem has flourished like nothing we’ve seen. The pace of innovation is unprecedented.
That’s the short background into what DeFi is and how it was started, now I will share a few points as to why you should choose DeFi over the current traditional financial services that you’re using.
Let’s begin with the issues that are often overlooked nowadays. Most banks have tons of hidden fees that nobody really talks about, you have account maintenance fees, minimum balance fees, overdraft fees, overdraft protection fees, ATM fees, multiple fees on certain transfers, and much more. None of these hidden fees will eat away at your finances when using DeFi. Yes, there are transaction fees (better known as gas fees) when you use the protocols but those fees are clearly shown to the customer beforehand and are only taken to compensate for the computational power your transaction used upon execution.
Okay, let’s say the hidden fees can be overlooked, what about the general user experience (UX). Suppose you want to make a big transaction, (buying a house, a boat, a car, or even a plane) you cannot make these transfers with complete ease. You have to contact a bank manager and then the other parties manager and then it can take days to move the funds and all in all the process is rather inefficient and annoying. Using DeFi, this process takes minutes without the need to jump past so many hurdles. It’s one of the major benefits of a trustless and permissionless financial system that has complete transparency.
Looking further into user experience, I think it’s no secret that the websites and apps of most traditional financial institutions are average at best. It’s usually a slow and clunky experience with occasional bugs. When you contact customer service to help you with the problems it takes hours for them to reply and sometimes they do not know how to help you altogether. It’s happened to me a few times personally and while it’s not the worst inconvenience in the world it can get frustrating. The UX on DeFi websites and apps is far more superior. Very smooth and aesthetically pleasing interfaces and when faced with any issues the customer support mechanisms are very good. clear instructions laid out and in the event that those instructions don’t help the customer support teams are efficient with their response on twitter or discord.
So now you know how DeFi makes using and managing your finances easier for you as a user, but to understand the true impact of this industry we have to zoom out and look at how it benefits and transforms society as a whole. Until now, we lived under the illusion of control of our finances when in reality we were courteously herded towards making certain financial decisions because our current “trusted” intermediaries (the banks) had their own incentives to fulfil. All of this changes with DeFi, people now have custody over their finances. The funds in their wallet are secured through private keys/seed phrases which only the user has and nobody else can access those funds. That’s real control and freedom. You can do what you want, when you want. Through one click you can connect your wallet to any DeFi protocol and take part in regular financial services such as lending, borrowing, investing, insurance and much more. You can essentially be your own bank. Bear in mind that this system does not have open/close hours, bank holidays, weekend halt of services or anything else of the nature.
Furthermore, there are almost no barriers to access. Literally anybody in the world with a Phone/laptop and internet access can use DeFi. Not only that but using DeFi has no bias, nobody gets preferential treatment based on societal status or financial status. It promotes pure meritocracy because everyone has access to the same services, all that matters is how you as an individual choose to use it.
Let’s take this one step further, According to Acuant and Forbes, it is estimated that there are 2 billion people globally who do not have access to a bank account or any sort of financial services. Think about that for a second. 2 BILLION PEOPLE. The knock on effects are tremendous because these people in turn will struggle to get access to better employment, better education for their families, and better housing etc. A common term used in the DeFi community to represent what I said is “banking the unbanked”. It gives a chance to people who never would have thought they could have one. We can see this with the rapid adoption in developing economies. The Philippines, Indonesia, Nigeria, and Chad just to name a few have seen really rapid adoption of DeFi protocols.
You have seen how DeFi empowers the individual and how it empowers society in general, but it also can reshape the general landscape of business as we know it. It has the potential to completely disrupt how organizations are structured. This is through something known as a DAO or a Decentralised Autonomous Organization. Most DeFi protocols are organized as DAOs and they’re different from traditional organizations in many ways. There is no hierarchy, the code of the protocols are open-source for developers around the world to work on, it is meant to make as many processes automated to eliminate human error, people working in the DAO can remain anonymous, decisions are taken through different types of voting mechanisms with the community which is a true representation of a free market, and every transaction or decision made by the DAO is on the blockchain for everyone to see. It truly revolutionizes our working life as we know it and is simply a leaner and more efficient way of running an organization.
So, I’ve shown you why DeFi is superior and will continue to get better in comparison to traditional finance, but it’s important to remember that this industry is very much in its infancy and quite immature. With this immaturity comes tons of risk, especially in the current environment. Exploits/hacks occur almost weekly at this point (Check Rekt.com) with millions of dollars being taken each time, there is no shortage of Ponzi schemes and straight up fraudulent protocols. Even the genuine protocols are not safe because most products and services are still in their testing phase and there are likely to be technical errors. So being cautious is extremely important but if you zoom out and look at the potential the technology presented by DeFi has then there is no doubt that it will completely reshape our global financial system as we know it over the next 7-10 years. The rate of improvement and innovation in this industry is unparalleled and will only continue to get better. So watch this space.
If you’re a beginner and want to learn more about DeFi then I highly recommend reading through the CoinGecko: How To DeFi Guide. It’s easy to read and extremely informative.
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Thank You.
Twitter @LeftsideEmiri