DEFI
The technology that facilitates decentralized finance is known as a blockchain. The blockchain is a distributed ledger of data that is spread across thousands of computers called nodes. The blockchain allows for the creation of digital currencies like Bitcoin, Ether, and Dogecoin.
Traditional centralized finance requires you to rely on a bank or other institution. You put your money in their hands and if you want to make a transaction of any kind, you trust that they will carry it out safely. But there are some significant downsides to this. Decentralized finance has been gaining traction because it provides a lot of benefits including low cost, transparency, programmability, and increased security. Decentralized finance removes the need for financial middlemen like banks and brokerages, so these financial instruments are available to anybody and the individual has more control.
The Downsides of Centralized Finance
Centralized finance requires you to trust a third party with your money. This means that there is a certain level of vulnerability and security risk involved.
Since these institutions are centralized, they can make internal changes to their systems without consulting the users or customers. The changes can range from adding new fees for transactions on their platform to shutting down the company entirely. In other words, you have to trust that they will not change anything against your wishes and best interests.
The transactions are also subject to delays because the process of taking money from one account and putting it into another can be time-consuming and requires multiple steps. When it takes a long time for transactions to settle, this can be frustrating for everyone involved. The inefficiencies of centralized finance can be seen in the mortgage process. There are multiple parties involved and they all rely on an institution to process paperwork and communicate with one another, which slows things down considerably.
But decentralized finance can remove a lot of these issues and it is likely that it will drastically change financial services in the future.
How Does Decentralized Finance Work?
The decentralized finance model consists of a number of layers:
Settlement Layer - The settlement layer is the basis that the whole system is built upon. This consists of the blockchain and the cryptocurrencies that use it. For example, Ethereum is the blockchain and Ether is the currency (coin or gas) that you use on the platform.
Protocol Layer - The protocol layer is where all of the software and the rules of the system are written. These are essentially the rules that everybody using the blockchain has agreed to abide by.
Application Layer - The application layer is where the underlying technology is transformed into usable tools for the consumer, like lending platforms or crypto exchanges.
Aggregation Layer - The aggregation layer allows for different decentralized finance tools to be used in conjunction. For example, being able to transfer different cryptocurrencies into traditional currencies.
What Are The Benefits Of Decentralized Finance?
The blockchain is a decentralized public ledger that records transactions made in digital currencies like Bitcoin. It is also used for many other types of transactions including storage of files and documents, voting systems, and even the creation of new smart contracts. Data from these processes are stored in blocks and chained together using cryptographic functions to ensure integrity and security. Decentralized finance utilizes this technology to create new currencies and allow users to transact openly.
The fact that a blockchain is public means that it is transparent and completely traceable. Everybody on the network has access to all of the data and there are no databases or third parties like banks controlling anything. This also makes transactions the possibility of being much cheaper than using traditional money because you do not have to pay any extra fees to a bank or another third party other than the general cost of using the blockchain.
One of the most powerful components of using a blockchain is that it can allow for the creation of smart contracts and use of artificial intelligence. The smart contracts are essentially automatic transactions and they can be programmed to only work if specific conditions are met. For example, you could create an escrow service where payments will be made after certain terms have been met, such as lawn mower services, or potentially group insurance. They can also be used to streamline the mortgage application and approval process because the relevant information is available to all parties immediately, such as the potential elimination of human capital of loan processors and underwriters. While underwriters may still be needed for that human aspect, the majority of the workload can be completed by the smart contract and a.i.
The Blockchain is also more secure because there is no central data storage place where hackers can attack and steal your money. Instead, all the information is distributed across multiple computers using complex encryption.
Financial institutions are more than likely already looking at offering a Bitcoin mortgage and using the blockchain to create a more secure and efficient process for offering mortgages. As the technology improves and becomes more widespread, it is likely that decentralized finance will transform the way that financial services work altogether.
We believe one day decentralization will have more of a presence, when that does happen MortgageQuote.com will strive to stay abreast of this technology and hopes to provide it to our clients.