From the dot-com bubble to the devastating subprime mortgage crisis, the mainstream financial system has failed us time and time again. This is not surprising, as the system was designed specifically for the whims of the top brass in the trading community, whose actions ultimately determine the fate of small traders looking for a piece of the pie.
Corresponding checks and balances have been put in place to cushion the impact of turbulent financial system fluctuations. Still, as we have seen in numerous financial crises, these measures are not enough. After all, humans are not infallible.
Cryptocurrencies such as blockchain and Bitcoin peaked between 2017 and 2018, also raising hopes for greater transparency and immutability of how money is used and traded. Still, Wall Street is failing again, and cryptocurrencies are the “victim.”
A new concept has emerged in 2020 that claims to combine mainstream financial services with the immutability of blockchain, coupled with machine learning data, to provide objectivity when conducting various transactions.
This is decentralized finance, or what we now call DeFi, and it aims to democratize financial markets without the frenetic speculative nature that plagued the ICO (initial coin offering) market in 2018.
Through the use of artificial intelligence, big data, and smart contracts, companies in the DeFi space are getting back on their feet, hoping to see changes in the way our financial system works.
As with all new concepts, enthusiasm runs high when they first appear, especially when these new concepts “promise” to change the status quo.
That’s why ICOs boomed in 2017 and 2018, when cryptocurrencies became a unique buzzword to challenge inefficiencies in the modern financial system.
During this period, startups in the crypto space have sprung up, covering everything from peer-to-peer lending to raising virtual pets.
There was an interesting value proposition popular in the crypto community at the time: not being limited by the restrictions set by intermediaries, and being able to profit from investments. And this value proposition has propelled crypto projects forward. There is no doubt that cryptocurrencies during this time have shown great potential.
However, the crash happened in late 2018. Users lose interest, investors fail to see decent returns, and regulators come knocking on the door. Some attribute the “tragedy” to the volatility of cryptocurrencies, while others point out that the trading volume of cryptocurrencies, especially in Asia, was insignificant at the time.
Experts vary in their explanations, but one potential point aptly sums up why cryptocurrencies have fallen out of favor: a general lack of understanding among groups such as investors, users and regulators. What really stops cryptocurrency from flourishing is its own elusive nature.
Although cryptocurrencies have recovered since the crash and are generally on the rise, the emergence of DeFi remains questionable: as the community moves away from a speculative cryptocurrency market determined purely by market forces, to the likes of artificial intelligence and smart contracts Is there another bubble like the one in 2017 in a market managed by more sophisticated instruments.
That’s not the case, according to Renato Barba, CIO of MachinaTrader, an artificial intelligence development firm for crypto trading.
The main difference now is that DeFi projects whose code is visible to the public are entirely enabled by smart contracts, which makes DeFi projects more trustworthy for investors. We should also take into account that the crypto market has grown in recognition since 2017 and the market has matured.
He also added that, unlike during the ICO bubble, DeFi projects are subject to external code audits designed to verify the legitimacy of their smart contracts.
This assures users and investors the credibility of the project and reduces their risk of falling victim to dysfunctional or fraudulent schemes.
Although DeFi is the same distributed ledger used by most crypto projects that emerged during the 2017-2018 boom, proponents of the technology claim that DeFi works fundamentally differently.
This is especially important given that DeFi aims to provide an alternative to mainstream non-crypto financial service providers as well as the highly speculative pseudo-platforms scattered across the crypto space.
The main difference is the use of artificial intelligence and smart contracts, which are supposed to create a simpler way of transacting while providing complete transparency to ensure that users truly understand the platform they are using, which was the barrier that prevented crypto from being accepted by the public in the first place.
Renato Barba said that as the market matures, users need to better understand the technical aspects of using legitimate DeFi platforms.
For ordinary users, when using the DeFi platform for various financial transactions, they need to understand how some technologies operate, including handling their own wallets through programs such as Metamask. This is also why, many users prefer to use centralized exchanges like Binance and Bitpanda because they are easier to use.
For DeFi to truly achieve the democratization it seeks, stakeholders in the industry must pay attention to the balance of making the technology accessible to all types of users while maintaining its unique complexity.
long and winding road
Undoubtedly, DeFi offers many of the same promises as the original cryptocurrency projects, namely providing a better alternative to financial services. However, as a very young field, it has to face hurdles to truly realize the vision of the cryptocurrency pioneers for a democratized financial system.
DeFi platforms need to make their operations and the ways in which users benefit from them more understandable and familiar, so that the public can easily access these platforms, just as the internet is ubiquitous around the world.
This is not only critical for users, but also for DeFi’s more cautious involved players, such as investors and regulators, whose decisions will be influenced by their understanding of the technology.
Finally, the DeFi space must leverage the credibility it promises users, which has waned as a whole after the collapse of cryptocurrencies. DeFi must identify trust-building measures and overcome the continued hype that will attract bad actors whose unscrupulous behavior will jeopardize the development of the technology.
DeFi may really democratize the financial system, but it will be a vision until it overcomes the insurmountable challenges of ICOs in 2018.
by Bob Machina
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/will-defi-decentralized-finance-be-the-answer-to-a-more-democratized-financial-system/
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