Decentralized finance (DeFi) is one of the fastest-growing sectors in the blockchain today. It's most likely you might have read an article about the disruptive power of DeFi or various yield farming services. DeFi projects are promising to give the power of finance to the people. In traditional finance. It's the big techs and government that controls the financial system, but in DeFi, users can borrow, lend, and profit on the system without any central authority. DeFi is essential for the development of the blockchain ecosystem.
How DeFi will disrupt loans
In traditional finance, the big banks like HSBC, JP Morgan, and cooperative societies controlled by the government are responsible for giving out loans. Still, in DeFi lending platforms like Compound and dYdX, it's a peer to peer loan lending platform in which the liquidity providers contribute to the system and profit by giving out loans and borrowers getting collateralized loans from the platforms. DeFi is excellent because of decentralization, transparency, and anti-manipulation features. There was a case in China recently that it was discovered that millions of Yuans we're borrowed with fake gold as collateral. This is not possible with DeFi because a smart contract controls the system without any human interaction.
The Chinese credit scoring system: how DeFi will provide a better solution
The Chinese credit scoring system is a solution provided by China in which every citizen is scored based on their behavior in society. It applies to this article because the credit score will determine if you'll be able to borrow loans from the government. The Chinese credit scoring solutions are outsourced to trusted government organizations in which they determine the scores. The criticism of this system is that the Chinese government is notorious for shutting up its citizens, which means that the system may give you a low loan score for criticizing the government. Many DeFi platforms are building systems similar to the Chinese credit scoring solution, but they are truly transparent and decentralized.
Problems with DeFi systems
You may be thinking that DeFi systems are perfect. The truth is that DeFi is still in its developmental stages and not fully regulated. We might see more unaudited contracts, dumps, scams, and failed projects in the coming months. Examples of projects that have witness challenges in their development include MakerDao, Sushi, Yam finance if you want to incest in DeFi projects. You must ensure that the smart contract is well audited and ensure that it offers an innovative advantage. Any project that is only focused on price without any significant use cases is bound to fail.
DeFi project that is making a difference
There are many projects in the DeFi ecosystem. Verus offers a unique solution that ensures that the pool is fair to every participant by solving all the transactions in one block. The conversations are quick, with 0.025% for fractional currency and 0.05 for reserve currencies.
Mike Toutonghi, the Lead Developer of Verus, said,
"Similar to the early days of PCs or emergence of the Internet, today’s blockchain networks are like single-tasking PCs with so much more potential. I see multi-currency protocols as a requirement to enable a decentralized financial network of blockchains and subnetworks that interoperate seamlessly. Today’s DeFi systems are too often being built at an application level, while native blockchain currencies, like ETH, BTC, or almost every other depends on its currency protocol, including emission and inflation, at the system layer.”
We have seen the impact of the growth of DeFi on Blockchain technology and how technology is solving many traditional finance problems. The challenges are numerous, but they are not bad because new technology experiences many problems before fully integrated. In recent years the world’s banking system on DeFi protocols.