Bitcoin is a decentralized currency not subjected to government and regulatory controls. Learn about Bitcoin’s rise and decentralization.
Proponents celebrate Bitcoin as the ultimate solution to government intrusion on financial liberties and corporate power. Bitcoin’s decentralized network facilitates seamless transactions across international borders without external intervention. It enables organizations and individuals to send and receive money without being subjected to government or institutional regulations, ensuring greater convenience and financial inclusion.
What is Decentralized Finance?
While many individuals have heard about Bitcoin and decentralized finance, very few understand what it means and how it works. Decentralized Finance (Defi) is an emerging concept in finance that refers to programmable financial applications and protocols built on blockchain technology. It facilitates the automated execution of transactions through smart contracts formulated on the blockchain.
Blockchain technology is an open platform where anyone can build businesses or products on or around Bitcoin. Decentralized finance has attracted about 5% of the crypto space, but experiences continued growth. As of 2021, there was about $93 billion worth of Defi assets in crypto markets. That indicates the significant decentralized finance’s impact on the global financial circles.
How Decentralized Finance Works
Through the traditional financial systems, borrowing $10,000 usually requires collateral like assets or money in the bank. A lender will review your finances and set an interest rate for the loan repayment. Then, the bank issues the loan from its deposits collects your interest payments, and could seize the collateral if you fail to repay.
The above example shows everything depends on the bank or lender since they control the transactional process and your money. The same applies to stock trading, insurance, and several other financial services. Even with the automation of various financial procedures, banks still have the intermediary role, raising the cost of credit and limiting borrowers’ flexibility.
Decentralized finance disrupts that arrangement by re-conceiving financial services as decentralized software applications, operating without assuming the custody of user funds. That means you can use Bitcoin as collateral. The blockchain creates a smart contract, generating funds from users with available funds for borrowers. Several crypto users, including crypto exchange platforms such as Bitiq, offer Bitcoin lending services. You do not need a bank loan officer or any paperwork.
Defi uses stable coins or currency-like tokens pegged to the US dollar to avoid Bitcoin volatility. It settles the transactions on the blockchain automatically. Unlike banks and other financial institutions that assign intermediaries to oversee transactions, Bitcoin payments occur on a blockchain without any third party. The blockchain validates all transactions on a digital public ledger, distributed across a network of computers worldwide. Each laptop or node holds a copy of the database, making it extremely difficult for anyone to manipulate transactions.
Benefits of Decentralized Finance
Numerous benefits to decentralized transactions include greater efficiency, flexibility, and security. It facilitates increased financial autonomy, enabling organizations, businesses, and individuals to manage their wealth as they see fit.
Decentralized finance eliminates the bureaucracies of the traditional financial systems, creating a leveled playing field for everyone to transact. Anyone can join a Defi loan pool and lend funds to others. It offers greater potential rewards with fewer risks than traditional systems.
Defi services run on open-source software that can be modified and integrated in numerous ways. For instance, they can automatically switch your funds across different collateral pools depending on the ones that currently provide the best returns on investment. Decentralized finance has inspired rapid innovation in e-commerce and social media and, analysts predict the trend will continue.
Bitcoin and decentralized finance are still new concepts but have tremendous potential to revolutionize the global financial landscape.