What is Decentralized Finance (DeFi)?

If you currently hold an account with any financial institution, then you’re no stranger to centralized finance; it’s the financial system that requires you to work with an intermediary when saving, trading or investing any of your money.

Decentralization of the finance industry, termed now as DeFi, has been occurring since 2008 when Satoshi created the Bitcoin. While not a complete success as decentralization, the idea was to create a way for people to perform peer-to-peer transactions without intermediaries.

While a great attempt at giving power back to the people, Bitcoin has proven the feasibility of peer-to-peer transfer of payment in  a completely trustless and permissionless setting. It was an integral part of the financial system, however, Bitcoin did not address other critical components of the financial system such as asset issuance, credit and risks.  This is where financial services, Blockchain, and decentralization began to come into play.

The Need for Decentralization

In a centralized finance system, the idea is that ordinary people hand over control of their financial assets to one institution, which then, in turn, uses it to optimize return and manage the risks involved. In this type of system, however, because one institution is controlling the transaction, it means that they’re also controlling all of the risks.

This type of power is dangerous, especially when those in control fail to see the risks involved and drive the system into a financial crisis, such as was seen in the 2008 housing crisis. A centralized market that was driven by excessive risk-taking led to the creation of toxic assets that couldn’t be sold and collateralized debt obligations. How could this have been avoided?

A decentralized finance system based on meritocracy and distributed ledger technology.

Blockchain-Based Technology Priming DeFi Markets

The rise of Blockchain technology has cultivated a market in which decentralized finance can truly flourish. This is due to the security and autonomous control it provides users with regarding their transactions. Blockchain-based financial technology greatly reduces the possibility that hackers can compromise the data as there is no single source to attempt to hack into.

Because of this, over-the-counter (OTC) trading in decentralized financial markets improves transparency, efficiency, and accessibility. This means that the development of Blockchain-based applications and solutions will lead to a more secure and optimized DeFi market for all participants.

Currently, the two most widely-adopted financial solutions that use Blockchain technologies to facilitate and promote decentralized finance are peer-to-peer payments in the form of Bitcoin and issuance and trading of ERC20 tokens supported by the Ethereum network.

Developing Solutions for the Future

As developers begin to understand how to harness the power of Blockchain technology as it relates to decentralized finance, they will be able to enhance the transparency, efficiency, and accessibility of over-the-counter financial transactions even further.

Developing a truly decentralized financial system allows for total transparency between all parties involved and facilitates trustless transactions based on mutually agreed terms and conditions; something which requires legal and third-party validation in the centralized financial system. In order to achieve this, it requires fundamental technology modules that allow for the issuance and discovery of financial instruments in a trustless and permissionless state.

As this type of technology becomes more advanced and widely adopted, it has the ability to promote global financial diversity that ultimately allows everybody to profit. In this sense, therefore, DeFi is essential in creating a truly autonomous financial economy in which everybody has the same opportunity to unlock the value of their assets and invest accordingly.

Building with NUTS

At NUTS, we believe the OTC market is an essential part of the decentralized financial system. We are committed to building the technology to enable an open and permissionless OTC market where decentralized financial applications can be easily created by market participants.

To keep buyers and sellers protected and accountable in the open OTC market, NUTS provides an accessible, distributed ledger that secures non-standardized trading and provides the transparency needed to safeguard every transaction.

NUTS is focused on simplifying building decentralized financial applications. Our approach is to integrate essential financial capabilities into smart contracts to create diversified technology modules. Our vision is to enable an open, inclusive and transparent financial market.