When you’ve been ingrained in a system for as long as you’ve lived, it’s hard to see past it and consider other possibilities. The way we, as a society, have learned about economics, finance and what it means to share and possess resources is one of those ingrained systems. Still, an alternate way is starting to make waves in the cryptocurrency sphere: decentralised finance, or DeFi.
The intersection of these concepts – especially that of DeFi and crypto – is almost inextricable. One cannot exist without the other, and both are entirely reliant on the open protocols and smart contracts of blockchain technology.
So what is decentralised finance? To understand, we first have to get a solid idea of what centralised finance is like right now. The financial industry as we know it is split into banks, corporations and bureaucracy, making it necessary for all transactions to have at least one middleman to facilitate them. In the case of a user to user transaction, that means instead of directing your money directly to the receiver, it has to go via each respective bank. In the case of customer transactions with a business, the same applies, and profit margins are reduced because of processing, handling and management fees.
But decentralised finance takes away the middleman, removing the corporate barriers that create these roadblocks. At its core, decentralised finance eradicates the notion that financial data and processes must be “owned”. A decentralised finance infrastructure is digital, open access and immutable, enabling users to take ownership of their actions in a real, tangible way. Essentially, rather than being controlled by a central entity, decentralised finance infrastructure belongs to the people.
Understandably, the transition to a brand new process and technology can be intimidating. Still, it’s important to remember that the decentralised finance model has been operating quietly for a while now through the trading and distributing of cryptocurrency on the blockchain. And eventually, decentralised finance will be something that we can embrace on a more open, general level.
And when it does, it’s not something to be afraid of. In a speech at the 2021 AFR Super and Wealth Summit, Minister for Digital Economy Jane Hume said, “Decentralised finance underpinned by blockchain technology will present incredible opportunities – Australia mustn’t be left behind by fear of the unknown.”
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