Decentralized Finance – Explained

date_range January 20, 2022
person Miriam
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DeFi, or decentralized finance, is an incredible innovation that is sweeping the financial scene by storm. There is no doubt that the earning potential in the DeFi sphere is huge, but what is decentralized finance and how can we use it to our advantage?

Welcome to crypto 101 on the Magic Square blog. Join us as we understand and explore the foundations of the crypto universe.  

Before we can effectively understand DeFi, we’ll need to get a grasp of traditional finance. We’ll explore the gaping problems with the current system that governs our money, creating the need for a replacement system. Only then can we understand why decentralized finance has emerged as an alternative and the immense value it has to offer us. 

future of finance

Problems with the Current Financial System

Conventional finance has undergone multiple innovations in the last few decades along with the technological revolution and the introduction of web1 and web2, each innovation making banking services more accessible to individuals from the comfort of their home computers, or via apps on the go. 

Financial innovation has culminated in the introduction of financial apps like PayPal and Robinhood which eliminate much of the bureaucracy we find with big banks and give users easier access to better financial services. 

The innovation in the financial sector that we have witnessed and experienced has definitely improved our day-to-day lives and brought us comfort and convenience. But, even with all of the technological innovation, the traditional system remains just that: a traditional system, one that has its roots as far back as 17th century London

There are a few main issues with this antiquated system: 

  1. Decisions that affect millions of people are placed in the hands of a privileged few 
  2. Access to financial services is based on parameters such as annual income and therefore these services are not accessible to everyone.
  3. Sending money internationally is expensive, and international fees are determined arbitrarily by a select few. 
  4. Limited privacy – third-party bankers involved in the maintenance of your assets maintain access to your sensitive account information.
  5. Slow processing times – despite the streamlined user interface of services like PayPal and Robinhood, transactions must be reviewed before being approved. Some transactions can take weeks to complete. 

The DeFi Solution

Decentralized Finance has come to solve the issues of the current system and provide a better alternative. 

The basis for DeFi is blockchain technology, which eliminates the need for third-party interventions while creating a secure and traceable framework for transactions. Blockchain technology is based on a ledger system that is distributed for validation to many validator nodes. Using cryptography, blockchain keeps information private, while at the same time verifying its truth. 

Another foundational pillar of DeFi is cryptocurrency. Think about it, if DeFi were based on conventional fiat currency, it would likewise be based on the traditional financial system, which, as we have already concluded is quite flawed. Cryptocurrencies are the key to DeFi functioning as a completely new and improved financial system. Cryptocurrency is borderless, countryless, and not subject to the whits and whims of governments. Instead, cryptocurrency is a digital store of value that is governed solely by its market value. 

Cryptocurrency is vital to the world of DeFi because it allows for the borderless transfer of value around the world, unrelated to native countries or global transaction fees. Transfers using cryptocurrencies are immediate and can happen at any time of day, any day of the week. 

Likewise, because of the accessible nature of cryptocurrencies, anyone with an internet connection can access any DeFi product or service available on the market, no matter what their income bracket reads, or where their address is listed. DeFi services include loans, insurance, staking, and exchange.

Since there are no middlemen involved in decentralized transactions, the cost/benefit analysis of these services outweighs those of the traditional market. 

These elements make for a more inclusive, private, global, and opportunity-oriented system. 

Even with all of these benefits, the DeFi market might look intimidating to newcomers. Magic Square is working to change this reality with integrated DeFi solutions, creating a seamless user experience across the world of decentralized finance. 

Be sure to join us on crypto 101 to learn the ins and outs of the crypto-verse and get tons of tips and tricks, and join our community to learn the benefits the first crypto app store is bringing to the space.