It is undeniable that the world has changed considerably since the beginning of the year. Many people are realizing just how tenuous the economic situation was in even the strongest economies of the world.
Which means that many people are feeling a lot of discomfort regarding their finances lately, to say the least. This all begs the question. Is traditional finance still relevant? After seeing its shortcomings, it is no surprise that people are turning to decentralized finance through the blockchain and cryptocurrencies.
In this article, I will go over why DeFi is so important and relevant now and how it can help lead to the future.
How does DeFi work?
The building block of this non traditional financial system is the blockchain. It is a series of transactions that are registered on a decentralized ledger meaning there is no one server. Rather than one server that hosts all of the different transactions, they are built on a string of hashes that are found on literally hundreds of thousands of computers. Using a complex encryption method, plus the fact that the information is not on one server, the blockchain is immutable and cannot be altered making it extremely safe.
It also means that there is no need for a central authority like a bank to act as a middle man for these transactions. Being secure, they are trustless and have eliminated a lot of fees and red tape that could hold people back from using traditional financing systems.
With just a BTC wallet, this all changes as you now have access to financial tools without needing a bank.
How it can be used
During a recession many banks are very nervous about lending money as jobs are being lost at a frightening rate. This means that if you are one of those people that find themselves between jobs or at least in a tight financial spot, there may not be much you can do.
Unless you turn to buying cryptocurrency. This decentralized finance means that there is far less scrutiny. For instance, there are some blockchains that allow for you to put up collateral like real estate or other assets onto the blockchain so you can borrow Bitcoin against it.
As long as there is somebody who is willing to lend against your collateral, then it will happen. Nobody cares if you have a job or not and there isn’t a computer algorithm in some bank’s server that decides if you get the loan or not.
Even in a much simpler scenario, you can buy and trade cryptocurrency to make extra money or park your money in coins to protect them from any uncertainty in the stock market or economy at large.
Is it stable?
One of the major obstacles in mainstream adoption of cryptocurrencies is the idea that they are not stable. While some volatility does happen on the blockchain, if you look at the charts over the last five years, you can see the enormous gains that have happened.
Like any investing or financing, there is no guarantee that you will come out ahead if you decide to buy or trade your coins during a crisis.