Mary Amakihi 
The Rise of Decentralized Ecosystem Platforms: A New Digital Frontier
DeFi is taking over the financial stage more with each passing day. This article discusses the rise of decentralized ecosystem platforms.
Decentralized Finance, or DeFi, is a new force that is quietly changing how we think about and deal with money in a world that is constantly changing.
This groundbreaking environment, which is based on blockchain technology, is starting a new era of financial inclusion, openness, and progress.
As we move further into the digital age, DeFi’s future looks set to be nothing less than revolutionary, changing the way we think about traditional banking.
The Basics of DeFi
DeFi (or “decentralized finance”) refers to financial services provided on public blockchains, especially Ethereum.
You can earn interest, borrow, lend, purchase insurance, trade derivatives, exchange assets, and more with DeFi, but it’s faster and doesn’t involve paperwork or a third party.
DeFi, like Crypto in general, is worldwide, peer-to-peer (meaning it is sent directly between two people rather than routed through a centralized system), pseudonymous, and open to everybody.
How DeFi Works
DeFi’s purpose is to provide many financial services that individuals and businesses presently have access to — loans, interest on deposits, payments — but to do so using decentralized technology.
In effect, DeFi alters the industry not so much by changing the what as it is by altering the how.
DeFi, in other words, builds new infrastructure to supply identical financial products and services.
It accomplishes this through blockchain technology and smart contracts, among other methods. Blockchain is a ledger technology that records all financial transactions on a platform.
Consider it a chronologically recorded running record of all transactions on that specific blockchain.
If Person A gives money to Person B, the transaction is permanently timestamped in the ledger.
“The DeFi building blocks are smart contracts, which are executable codes that can store cryptocurrencies and interact with the blockchain according to its rules,” says Oleksandr Lutskevych, CEO and founder of CEX.IO.
This firm supports DeFi and cryptocurrency.
Smart contracts execute transactions among participants automatically to enable DeFi. They self-execute their set of instructions when the contract’s requirements are met.
“DeFi allows trusted intermediaries — such as banks or brokerage firms — to take the place of smart contracts on the blockchain for peer-to-peer transactions,” explains David Malka, CEO of YieldFarming.com, which helps investors generate income from Crypto.
“These peer-to-peer transactions in DeFi can include everything from payments, investments, lending and more.”
Cryptocurrency has become the de facto money for transactions and records worldwide.
“DeFi is the natural continuation of the vision outlined in the Bitcoin white paper of creating electronic cash, so it is a very exciting time in the industry,” Malka said.
Benefits of DeFi
The pros of DeFi for individuals include better security, possibly lower costs, a more comprehensive range of services, and the chance to make more money from their crypto holdings.
Decentralized apps made by different groups make these and other benefits possible.
“Decentralised applications, or dApps, let people send money anywhere in the world (quickly and cheaply), borrow and lend money to other people, use crypto exchange services, non-fungible tokens (NFTs), and more, such as crypto wallet and storage solutions,” says Lutskevych.
He says developers pre-program DApps to do different things, such as carry out transactions on a particular blockchain network, settle agreements between buyers and sellers or move assets from a decentralized exchange to a decentralized lending platform based on their purpose.
In short, the only thing that stops you is your skill to code an app that does what you say.
One famous benefit for cryptocurrency investors is that they can make money. When people own a coin, they can help support its environment and make money by validating transactions.
This is called crypto staking. It’s a part of farming called yield farming. That seems like a good idea now that bank interest rates have been meager for years.
“Through a process called yield farming, anyone can lend or sell crypto assets, and the person who does so gets paid back with interest and fees,” says Malka of YieldFarming.com.
“Yield farming is how you make passive income with your cryptocurrency.”
Many dApps need live cryptocurrency to be available on the app to work. To get people to put their coins up for a while, they offer to pay them money or a return.
They give people who provide liquidity an income, like interest on deposits at regular banks, but with more risk.
The Decentralized Ecosystem
The DeFi ecosystem is a broad and ever-changing field that includes many decentralized apps (DApps) and platforms. Compound, Aave, Uniswap, MakerDAO, and Synthetix are some of the most prominent DeFi projects.
These platforms provide various services, including decentralized lending and borrowing, decentralized exchanges, and yield farming.
Users can participate in these services by providing liquidity, staking tokens, or interacting directly with smart contracts via their Crypto wallets.
The Impact of DeFi on Traditional Banking Systems
The development of DeFi has significant implications for current financial institutions. It threatens the dominance of centralized institutions by delivering more accessible, efficient, and transparent financial services.
As DeFi becomes more widespread, incumbent banks, payment processors, and other middlemen may face decreased service demand.
In addition, DeFi could make finance more open to everyone by sharing economic power.
In traditional financial systems, control is often centralized, which helps large businesses and wealthy people.
DeFi, on the other hand, makes sure that everyone has equal access to financial services and gets returns on their investments without having to rely on central gatekeepers.
Some of the ways DeFi is impacting the traditional banking system include;
- The power grab
- Empowering individuals
- Aspects of payments
The Power Grab
As more and more people use DeFi and Web3, they change how power works in the financial business.
For a long time, centralized institutions like banks, asset managers, and exchanges have had a lot of power over financial activities, decisions, and the economy as a whole.
The rise of DeFi and Web3, however, is moving this power to the personal level.
DeFi and Web3 use decentralized networks, blockchain technology, and cryptographic principles to let people do business with each other directly, building a peer-to-peer financial ecosystem.
With smart contracts, everything is clear, and trust is constructed automatically, so there is no need for middlemen or the fees that come with them.
Removing intermediaries is shaking up old ways of doing business and putting established institutions at risk of losing their power.
Empowering Individuals
Individual empowerment is a critical component of DeFi and Web3. These technologies enable anyone with an internet connection to gain access to financial services without the assistance of banks or other intermediaries.
Users can borrow, lend, trade, and invest directly from their digital wallets, removing the need for third-party approvals or time-consuming regulatory processes.
This level of financial inclusion can potentially transform access to capital, especially in underprivileged areas where traditional banking services are restricted.
Furthermore, DeFi allows consumers to keep ownership and control of their cash at all times.
Unlike traditional financial systems, which give custodial authority to intermediaries, DeFi will enable individuals to keep full custody of their assets.
This implies that customers have complete control over how their assets are utilized and can avoid the hazards associated with centralized custodianship, including hacks, freezes, and mismanagement.
Aspects of Payments
This is another area where DeFi has a lot of room to grow, especially when providing payment methods that can handle a lot of transactions at once.
In traditional systems, information has to go through a central point to be approved for transfers. If this main point fails, the whole payment network will likely fall apart.
People may also need help to use traditional financial services or make payments in some countries. Many people must learn that banks must start an account and enter the system.
Some DeFi platforms are trying to fix these two problems, and it may be possible to use payment systems through DeFi channels without showing an ID approved by the government.
Also, because they are spread and not centralized, DeFi platforms are much less likely to have problems when a central system goes down.
Because of this, DeFi payments may only affect certain countries or groups of people within those countries (i.e., places where many people have trouble getting legal ID).
In general, the growth of DeFi payment systems is not expected to affect current banking systems significantly.
In addition, governments in many countries are looking into whether it is possible to create and use central bank digital currencies (CBDCs), which would have an even more negligible effect on DeFi payments.
The Need for Institutional Adaptation
If institutions see the promise in DeFi and Web3, they could stay caught up in a world that is changing quickly.
Some traditional players are looking into blockchain technology and tokenized assets, but many are still figuring out what it means and how it might change things.
To stay relevant in the future, these organizations must change how they do business, be open to new ideas, and take advantage of the benefits of decentralization.
When traditional organizations and the DeFi/Web3 ecosystem work together, they can encourage new ideas and connect the old and new ways of finance.
The openness, efficiency, and friendliness of DeFi can teach institutions a thing or two, and DeFi projects can gain from the knowledge, regulatory compliance, and larger customer bases of well-known institutions.
Hybrid models that take the best parts of both centralized and decentralized systems can be made when these two worlds work together.
Bottom Line
As DeFi becomes more popular, regulators, legislators, and industry participants must collaborate to develop a framework that balances innovation, investor protection, and market stability.
Regulatory clarity would not only minimize risks but it would also boost trust in DeFi, attracting new players and capital.
