Bitcoin tends to outline the decentralized finance space in a somewhat embryonic fashion. However, It is the best utilization of artificial intelligence and perfect trading strategies to help newbie traders in their trading journey.
But with more and more startups using DeFi to build innovative platforms, the decentralized finance movement is quickly gaining momentum.
Let’s cover what decentralized finance is and its potential impact on the future of finance, why bitcoin provides such fertile ground for decentralized finance innovation, and what some of the most bitcoin benefits are.
What is decentralized finance?
As the name implies, decentralized finance entails using technology to decentralize control over financial assets. Whereas traditional finance (i.e. centralized finance) involves a financial intermediary such as a bank or credit card company, which acts as the sole custodian of user funds and maintains records of all transactions, DeFi allows users to make and receive payments without intermediary systems.
Because the technology behind decentralized finance is open source, any developer can offer their services. As a result, new decentralized finance applications can be created without requiring private companies to develop or maintain them.
Decentralized finance vs traditional finance
In most cases, a user must rely on an intermediary to send and receive money. Centralized finance often involves a governing body that decides which payments are valid and which are not; this body is responsible for keeping track of all transactions on a centralized ledger and ensuring that transactions have been made according to regulations set by the governing government.
So what happens in a decentralized finance world? First, intermediaries are removed, and the users decide on the transactions’ validity. In the Ethereum blockchain, for example, no “government” runs the platform; therefore, users can send payments directly to each other without needing an intermediary to verify transactions.
Bitcoin provides fertile ground for Decentralized Finance
Here are some of the fundamental characteristics that make bitcoin a perfect foundation for Decentralized Finance:
Highly secure digital ledgers – Bitcoin has proven itself as one of the most secure digital ledgers over the past decade. As a result, financial institutions find it difficult to compromise bitcoin’s distributed network, while hackers often target cryptocurrency exchanges. Recently, the media has reported that hackers hijacked cryptocurrency exchanges and stole user funds.
However, in most cases, the exchange operators did not use proper security measures to protect their customers’ assets. For example, the most reported case of stolen funds occurred when Mt Gox, a bitcoin exchange based in Japan, was hacked in early 2014 and lost about 850 000 bitcoins worth $450 million at the time (860 000 bitcoins were stolen between 2011 and 2014).
Peer-to-peer payments – Users can send payments directly to each other without relying on any third-party intermediaries such as traditional financial institutions or cryptocurrency exchanges. Ethereum blockchain – Ethereum is a decentralized application platform that can run smart contracts on a blockchain. While bitcoin is a cryptocurrency and payment network, Ethereum is a technology platform with its cryptocurrency, ether. Ethereum provides the fertile ground for Decentralized Finance due to its ability to efficiently run decentralized applications and smart contracts.
Ensures that all transactions are recorded permanently and tamper-proof – Whenever a user sends an Ethereum transaction, it is added to the Ethereum public ledger called a blockchain. Any attempt to change data on a block would result in a “fork”, and other nodes in the Ethereum network would reject both versions; this ensures that all transactions are recorded permanently and tamper-proof.
The bright future of decentralized finance:
Decentralized finance is a rapidly developing financial technology that holds the potential to disrupt traditional finance truly. The industry is still in its infancy, and we don’t know exactly how it will develop in the short or long term, yet it has already disrupted traditional finance.
One example is DeFi’s ability to democratize access to credit. Further, DeFi applications can connect people with excess money and those who need it to expand their businesses and personal lives.
Other advantages of decentralized finance include:
Low fees – Decentralized finance applications such as 0x allow users who operate as endpoints (a node on a p2p network) on the blockchain to earn fees by facilitating open market operations through an off-chain order book.
Secure peer-to-peer transactions – Anybody with an internet connection can send a payment or exchange money directly with others without having to rely on traditional financial institutions or centralized organizations.