Yes, you read that right. Banks should be scared. The never-ending natural cycle of life will take the banks to bankruptcy, pun intended. The new replaces the old. Well, what’s the new? And should I be scared?
No, you should be excited! A new, innovative finance system is being created, De-Fi. Decentralised Finance. If you have no clue what decentralised means, or what blockchain is, read my previous article on it.
What Is Blockchain And Will It Replace The Internet?
I’ll explain what blockchain is, where it’s used and if it’s able to replace the internet!
So what is De-Fi? De-Fi is a blockchain-based form of finance. So one of the possibilities of this is a decentralised bank. So instead of using a banking app to send money to someone, you could use a dApp, a decentralised app. That’s an app that interacts with the blockchain.
Why be bothered to change, everything works just fine. Well not really, every day you’re losing money. Inflation is eating up the value of the money in your bank account. Back in the day, banks gave interest, around 6%, to you. In the 70’s it was even 14%. This would even out the inflation rate and it gave an incentive to put your money in the bank. Now, the interest rates are not even 1%, it’s basically 0%. Yep, we’re fucked.
Why banks aren’t good
To fully understand why it’s good that banks are being replaced, you need to understand how a bank operates. Banks are for-profit companies. They want to make money off your money. The second you put your money in a bank, they move it around, invest it, loan it, etc. Back in the day, they still shared some of the winnings with you through interest. Now? Nothing.
If you want to transfer money to someone across the world, it’ll take days. Because they move the money around from bank to bank. That on its own already has fees. And then if they use another currency, you pay the exchange rate on top of the other fees. INSANE!
Also, if you want a loan, you need to qualify for it. They want to be sure you can pay all the interest fees. The banks have all the power over your money.
Cool projects in De-Fi
Okay, now you understand how banks are pure shit. What now? De-Fi baby!! Instead of putting that precious money into a savings account, while inflation eats it, you could put it into a De-Fi platform that pays you an APY for it. Or simply said, you get more money by putting money in there. Amazing right?!
The sceptics of you are now thinking why would they pay us? I’ll use Uniswap as an example. Uniswap acts as a bank. It provides liquidity to the people who need it. In simple terms, they use your money to loan it out to people. And in return you get the profits of the transaction fees, there is no greedy company taking it all. Instead, the people who provide the money will get the profits.
Well, how much can I earn from my savings account? The De-Fi space usually promises anything between 7–13% returns yearly.
Another weird space that’s finally getting the traditional media’s attention are NFTs, Non-Fungible Tokens. Why is it weird you may ask? Because they’re like digital collectables that exist on the blockchain. So you can buy cool art from people and own it digitally. Well, can’t anyone just screenshot it? Yep! Told you it’s weird.
It does have good use cases. It could act as a concert ticket. No one can fake one, and you get to keep it as a souvenir. That’s cooler than a stupid ticket. Sports could also monetise this. Creating a highlight goal into an NFT and then selling it for a ton of money. A better use case might be transferring ownership of a house to someone else using an NFT. One NFT would represent one house in this case.
Why De-Fi is better
Bye bye human errors
Humans make a lot of mistakes. A bit too many actually. Tired overworking people just overlooking a simple number and BAM! You accidentally caused a financial crisis. Okay, maybe I’m exaggerating just a tad. But accidental errors do happen all the time when you work with humans, especially in the finance sector.
But thanks to this amazing technology, human errors on a day-to-day basis are completely removed. Unless the smart contracts were poorly written.
Lotteries and gambling games currently take a cut of all the money they receive before giving it to the winner. You could create a smart contract that does everything automatically. I will create a simple version of this kind of lottery system soon, so stay tuned!
Currently, you need the approval of a bank to send a transaction somewhere. They can just stop the transaction if they want to. In De-Fi everything that’s yours, is in your control. So you can withdraw all your money without any permission.
How do the transactions work on a De-Fi platform?
For normal people
The dApps will interact with a smart contract. Then the transaction is sent to the blockchain, and once verified, it’ll go to the account to whom you wanted to send a transaction.
Let’s take the second transaction as an example. The output of the first transaction will be hashed with the public key of Owner 2. An oversimplified example of hashing is, changing every letter in your name to the next one in the alphabet.
The public key of Owner 1 will then verify that output and the private key of Owner 1 will sign it. Similarly to signing a contract. This ensures the validity of the transactions.
That’s why you can’t change anything on the blockchain. Similarly to when you have signed a contract. They can’t just print another contract and say you signed the newly printed one. Your signature is only on the original one.
Depending on the coin it will usually be either Proof of Work or Proof of Stake. That’s the consensus mechanism. How all the nodes, or computers participating in the blockchain, can agree if something is valid or invalid.
Okay, all of this sounds good, but is there anything you should worry about. Nothing is perfect.
De-Fi comes with its shortcomings. Since the power is in your hands, the responsibility is also in your hands. That means if you make a stupid mistake, which costs a lot, you can’t contact the bank to revert whatever you did. You pay the price.
Another problem is scalability. When the blockchain grows a lot it faces two main problems. Either the blockchain is extremely slow, or it’s very expensive. You can see this in the Etherium blockchain at the moment. The gas fees are extremely high. This problem is a part of the blockchain trilemma. It states that you can only achieve one out of the three mentioned in the picture below.
All the De-Fi projects work through smart contracts. If there is a minuscule error in the code, it can lead to an immense loss of money. And as said before, you can’t change data on the blockchain, so updating a smart contract isn’t the easiest.
Liquidity could be considered as one of the most important things in De-Fi projects. And sadly enough the total liquidity of De-Fi doesn’t come close to traditional finance.
De-Fi is still a new technology, but it will undoubtedly change the game of finance. Banks will either adapt to it or be replaced.