The technological environment is transforming the financial world. According to the Financial Inclusion of the Central Bank of Argentina, (BCRA), more than 85,000 transactions per adult using electronic payment methods, such as digital transfers and debit cards, were made in June 2021. The total transactions increased by 40% compared to the same period in 2020. Kimberly Rosales, an expert in digital payments, explains how decentralized finance (DeFi) can become the solution that promises to solve the problems of the current system.
This development is still located within the ecosystem of conventional finance, composed of financial institutions, such as banks, exchanges and brokers, which allow lending and borrowing money and exchanging financial assets. The real change will come with DeFi, which includes the use of blockchain and other IT processes that are expected to revolutionize the sector.
For Rosales, DeFi is a “circuit” of financial products that use this new technology and others such as cryptography, consensus algorithms, peer-to-peer systems and smart contracts to avoid having to rely on a central entity such as those that predominate in the conventional financial environment. This is only possible through the use of decentralized applications (DApps), which are nothing more than programs that do not rely on a single counterparty interacting with a central server, such as WhatsApp, Instagram, YouTube, Twitter, and virtually any conventional application do today.
“Since there is no company, no central entity, that has to verify the sending or generation of transactions, each of the users of DApps acts as a node in a decentralized network of transactions,” explains Rosales. “Then, in that way, it is verified and assured that the transactions that are made through those DApps are genuine, original, all in a highly private environment.”
The expert emphasizes that “all these DApps have the ability to interact with each other, forming a kind of, as it is known in the industry, ‘Lego’ of money.” Rosales also points out that what DeFi does is to try to ensure that financial processes such as the exchange of assets and money and loans “are automated in a blockchain through a series of business rules that say how the whole operation of these markets is going to be done.”
In this framework, she points out that there is not entirely a team, a company, behind it, as this software directly connects the parties entering into the transaction. At first glance, it might seem that DeFi does not bring much more than an IT change. However, proper implementation could have a very positive impact on the economy of society.
First of all, Rosales points out that all transactions and transfers of value carried out in the DeFi environment are public and verifiable, which provides “unprecedented transparency,” which translates into high security and reliability. The specialist maintains that the fact that the exchanges are visible and exposed allows any user to verify them in the same database that interprets them in encrypted form. In addition, only the public addresses where the assets that are part of each transaction are hosted are disclosed, so that the parties maintain their privacy.
On the other hand, as it is a solid construction of computer codes that automate the operations, the risks are only found in the failures or vulnerabilities, but not in the system itself, which guarantees the effectiveness of the exchanges. Likewise, the ecosystem is highly efficient because it is highly interoperable and does without financial intermediaries.
DeFi’s ability to cross borders is linked to the lack of central counterparties that are tied to the rules and laws of each region, as well as to the proprietary systems they must use. “If I have an Internet connection and I have been trained in how these things work, I can use any of these applications without anyone being able to censor me and on equal terms with the person who is in New York, London, Singapore or any international financial center,” the expert explains, referring to the fact that it is not necessary to be in a privileged area because DApps are global.
Specifically, the great change brought about by the advent of decentralized finance is the greater financial inclusion that will take place in the world. Rosales concludes that DeFi’s potential for inclusion is spectacular and provides opportunities for literally everyone to participate in the financial system.