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What Is Decentralized Finance? Should You Be Interested?

The phrase Decentralized Finance has been quite “buzzy” for a long time. It all started with the introduction of Bitcoin which was initially proposed as an alternative to fiat money. With more time passing by, it is becoming clear that Bitcoin is not money, at least not yet, but storage of value. It is more comparable to stocks and commodities than to traditional currencies.

However, cryptocurrencies do have innate utility and can be used as the main form of money in the future in certain circumstances. We do not know whether it will happen. Many experts continue debating the issue of switching up things in the global economy and transitioning to Bitcoin which is a decentralized blockchain ledger that contains information about every single transaction to prove that these transactions have value.

Decentralized platforms that will change the world

While people were toying with the concept of digital wallets and money that cannot be controlled through traditional instruments that belong to monetary policymakers, many started understanding that the principle of decentralized governance could be applied to anything. Various ideas started appearing in the industry with many people thinking of ways to make everything, from cloud computing to data storage, more democratic and decentralized.

These concepts were promising and many people saw the value of utility that decentralized governance could bring. However, it was even more apparent that there was a big market for people who were interested in decentralized financial services. Imagine banking, money transferring, lending, crypto price analysis, and other services that cannot be controlled by biased national governments and financial institutions.

Blockchain allows people to take control in their hands by providing several essential rules for interactions:

  • Governance is done by voting with, generally speaking, people holding more tokens receiving more voting power;
  • Tokens are distributed among users as evenly as possible and chunks are reserved for different groups like early adopters, developers, and enthusiasts to ensure that power cannot be centralized;
  • Every transaction is immutable and can be accessed by any member of the project to verify the validity and legitimacy of the network.

The current state of affairs

Decentralized Finance became the new hot topic for water cooler discussions with many people talking about the amazing possibilities that decentralized finance would bring to the table. However, we have to point out several apparent weaknesses that these projects have and how many already were exposed as weak networks:

  • Centralization is still possible due to the ability of certain whales to simply buy their voting power if they choose to do so;
  • Liquidity is a primary concern for many networks that want to make it and some are messing with booking to look good;
  • Decentralized governance does not mean that decisions taken by the majority will benefit the project in the long run.

One of the brightest examples of a failed DeFi project is Terra Luna. A now-infamous project that was supposed to be a stablecoin (pegged by the US dollar) that, as it turned out, worked as a Ponzi scheme because many members did not believe that the model could fail. It did and brought down many other DeFi projects that were related to Terra Luna in any capacity.

Multiple other stories also point out that DeFi is not a miracle. It is an approach to controlling finances and providing valuable services. However, it still demands scrutiny and testing before we can trust our fates to promising projects.

Right now, we have many interesting DeFi platforms that deserve your attention. Projects like PancakeSwap, Polygon, PolkaDot, and many others are working just fine and managed to stay afloat even during the crypto winter!

The main takeaway

Decentralized Finance is a very interesting concept that will change how the global economy works. However, the degree of impact from DeFi may be less impressive than many enthusiasts predict. As always, do your research and learn about decentralized finance projects on your own!

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