Will decentralized finance – DeFi – establish a new financial order?

The basic characteristics of blockchain technology are the reliability and undeniability of transactions, although transactions take place between participants who do not know each other and whose identity is hidden.

Although blockchain has gained its popularity primarily thanks to cryptocurrencies, its application is much wider and is able to support various types of business. Cryptocurrencies, although initially neglected, are gaining in popularity and their application is gaining in both scope and importance.

Looking at the blockchain from the developer’s point of view, it is necessary to develop applications that would use the technology itself and achieve the set goals, depending on the area in question. Without software applications the technology could not be used.

In the field of cryptocurrencies, many different applications have been developed that enable the trading of cryptocurrencies, primarily the applications of crypto wallets and crypto exchanges.

After the mentioned applications, applications of “smart contracts” were developed, which follow the elements of the contract between the two parties as well as their financial realization.

The complete system of cryptocurrencies, including the functionalities performed by applications, is based on a decentralized concept, that is, there is no central point that would control the system, nor is there a central database in which all the details of transactions can be found.

Traditional financial systems consist of centralized databases as well as controlled applications that perform certain functions. Financial institutions have developed mechanisms for strict control of all cash flows. Controls are used to take measures to preserve the stability of the financial system as well as to prevent money laundering and terrorist financing.

Cryptocurrencies have a decentralized structure, so it is not possible to establish identical controls. However, the developed system that enables the management of digital assets, smart financial contracts and protocols is controlled by a system of decentralized applications – DApps. The described system is also called DeFi from the term Decentralized Finance.

It is obvious that in contrast to the traditional, centralized financial system, a new decentralized financial system is developing, which by its expansion threatens to jeopardize the classical financial system. If we take into account the fact that the complete program code is open source, ie available to everyone, it becomes obvious that the new financial system is completely transparent.

DeFi enables the creation of monetary banking services, the provision of P2P as well as unified trading platforms as well as the development and use of more advanced financial instruments such as DEX(Decentralized Exchange), financial forecasting platforms and more. As in the classic financial controls in DeFi dApps can be used for KYC, AML but also other digital money flow management services.

We can conclude that DeFi view of the financial world is redirecting traditional financial products into open source software and a decentralized financial world. In this way, the need for intermediaries is eliminated, transaction costs are reduced and the level of system security is significantly increased.

Decentralized finance continues to evolve and it is only a matter of time before it takes precedence over classical financial systems and creates an entirely new financial world.