Decentralized Finance and its key elements

Estimated read time 3 min read

The revolution in the financial world continues to run, thanks to the spread of new Cardano Blockchain technologies linked to decentralized finance. A very interesting application field is that related to cryptocurrency trading, in fact, today it is possible to buy digital coins through specialized exchanges, keep them in digital wallets and resell them on the crypto market, almost eliminating conventional intermediaries.

At the base of this new phenomenon, two fundamental elements can be identified, present at different levels and they are decentralization and disintermediation.

1) Decentralization

In common jargon, the term “Decentralized” is associated with the accessibility features of services. Analyzing the various definitions and the main applications, decentralization in the first place is observed on three dimensions that can have different levels of intensity and combination:

Governance – decisions relating to the provision, characteristics and evolution of the service are taken by the community of users of the same;

Risk – the different types of risk associated with the financial services used are assumed by the user himself without any guarantee from the provider;

Data management – financial data is present in multiple copies on different servers not owned by the provider and accessible to all.

2) Disintermediation

Financial intermediaries with commission-focused business models tend to make transactions less efficient in industries where the drive for cost reduction is strong and ongoing.

Decentralized Finance services determine the reduction, or elimination, of some or all of the intermediaries of service, allowing users to interface directly with each other.

The technologies underlying Decentralized Finance

At the base of these applications, there is a constellation of technologies that allow the decentralization, more or less extreme, of financial services.

The “weak” form leads to a reduction in financial intermediaries and only partial decentralization of the service provided. The first examples of weak decentralization come from the use of well-known technologies such as Peer-to-Peer platforms.

The “strong” form foresees the total absence of financial intermediaries and the complete decentralization of the service. It is the one that is best exemplified by the recent Defi phenomenon. This phenomenon is characterized by services that present a strong decentralization on all three dimensions.

The economy of the future

The interoperability and accessibility characteristics of Defi services have the potential to create an inclusive and global financial market, making obsolete not only the current geopolitical balances but also national regulations, since the stablecoins, on which most of the services are based highly decentralized, they are disconnected from central banks.

Tao

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