Anshul was pestering Samarth as to how decentralized financing was the future ahead. Samarth was intrigued but not convinced. That’s when Anshul realized how his friend was one of the many who still did not fully grasp the web3 technology and its vast dimensions.
Anshul then decided to explain it to Samarth while clearly explaining how it is an evolutionary concept.
Let us all read further for a better understanding.
Stuck in the quondam
Over the last century, our centralised banking system has remained mostly unchanged. Processes may have been digitised in everything from insurance to banks, brokers, exchanges, and central monetary authority, but the requisite infrastructure remains identical.
Look at one early Western Union wire transfer, which dates back to 1873. It costs $300. The fee was $9.34, or nearly 3% of the total. A 3% fee is still prevalent for standard credit card transactions 149 years later. If you tried to send a $300 Western Union transfer today, it would cost much more than $9.34.
DeFi provides the highest interoperability between blockchains and two financial realms (crypto and traditional). Currently, some projects are incorporating decentralisation into fiat systems in a variety of methods, such as;
Traditional financial assets are traded as Synthetic assets in DeFi. Peer-to-peer payment options are available on some sites. NFTs are already changing the way royalties and other payments are handled in the music industry.
Familiarizing smart contracts
Smart contracts have the apparent benefit of allowing you to borrow and lend your bitcoin without needing an intermediary, eliminating many of the hazards associated with traditional lending. DeFi savings accounts might work similarly to bank savings accounts but with better interest rates and the ability to pay out daily, weekly, or monthly.
It is a computer code that serves as a digital contract between two parties. A smart contract is a computer programme that runs on a blockchain and is stored in a public database. It cannot be changed. Smart contracts can be sent automatically without the involvement of a third party since the blockchain handles them. Only after all of the terms of the agreement are met does the peer-to-peer transaction end.
Anything may be tokenized using DeFi, including goods, services, art, and music, to mention a few. As a result, you will be able to choose how to pay in the future. Perhaps you pay with a gold-backed token at the supermarket; maybe you use one backed by IBM stock. It is entirely up to you. A decentralized exchange smoothly converts your asset into anything the store wants if your decision does not match what the store wants. This is bartering – but it’s efficient bartering. Central banks are competing in today’s world. They lose their monetary monopoly.
There are numerous risks involved with DeFi, as well as countless potential, such as the democratisation of finance. It’s early days — we’re just 1% into the DeFi disruption, and for the time being, we’re only seeing the foundations of a new metropolis. However, DeFi isn’t a renovation. Our financial system is being completely rebuilt.