We have all had an experience with middlemen. Be it buying a new car, looking for a new house, or even getting a driver’s license! Middlemen are an almost inevitable part of our systems and institutions; despise how much we lament the need to have them. Middlemen and finances, how do they get along in the latest offset?
It may surprise you to know that intermediaries exist on more profound levels than we previously imagined. Take your money, for instance. The first thought that any individual with a considerable sum of money has is to put it in a bank, arguably among the essential institutions in managing our finances.
While it may shock you to learn that banks too are no strangers to the existence of intermediaries, the “middlemen” in this equation are more insidious, hiding behind the cover of legitimate third-party organizations with a fee on every transaction. They are commonly spread across the supply chain in the financial sector.
For instance, when purchasing through credit or debit cards linked to a bank account, many different entities are involved in that simple transaction. At the point of purchase, the charge goes to the merchant’s bank, which initiates a request over the network to the issuing bank. Each of these points incurs a charge, meaning that the customer does not pay for only the products they buy but also for the services of these entities.
The news is not all bad, though! With the emergence of blockchain technology and cryptocurrency, the digital world is bringing a revolutionary way of managing personal finances to the table. To put it simply, it is a proposal to eliminate mediators who have long played in personal and professional finances.
DeFi, or decentralized finance, is an innovative solution to middlemen’s problems in financial transactions built on blockchain technology. It essentially utilizes a shared, distributed ledger of transactions to all associated members and users of a platform, with money moving between each parties’ secure online wallets.
This ledger system is similar to the decentralized platforms that most cryptocurrency communities are based on and works on a peer-to-peer approval system that enables safe, secure transactions.
The system used to make the decentralized ledger secure is called the consensus mechanism and is an essential component of both blockchains and Defi platforms. It essentially acts as an aggregator of single values across different systems. This data is then consolidated into a single whole with the latest, up-to-date information on any changes in the network.
The aggregation and consolidation process enjoys unprecedented control over the system by every user interacting with it. It is because decentralized platforms are established based on a common, mutually agreed upon set of protocols that allow all of their user’s transparency, accountability, and security within the system.
The key benefit of a peer-to-peer distributed ledger powered by such software is that it essentially performs the role of banks and other entities in the financial sector hassle-free. It allows for the transfer of funds directly between interacting parties without needing a third-party service provider to step in.
So, finally, no middlemen.
However, DeFi, as an extension of blockchain technology, and through the use of cryptocurrency, has brought out an evolution of KYC. Called Know-Your-Transaction (KYT), it extends the concept of KYC to each and every transaction linked to a digital address or wallet, while protecting the identity of the user. This addresses the needs of both AML and CFT regulations, making their processes faster and easier, but also addresses the privacy concerns of KYC requirements to a large extent.
Such advantages point to eliminating third parties and intermediaries from financial transactions between different entities. But the potential for customized services is an equally important aspect of DeFi technology. Imagine a world where you can set up a personal loan on terms that you actually find agreeable!
Amazing, isn’t it?
There is also a lot of speculation about resistance to the technology from established institutions in both the private and public sectors. It is important to remember that centralized financial models are the primary breadwinners for banks and other institutions, and DeFi is a direct threat to their profits. Potentially, these entities may either look to block the technology’s adoption or begin to engage with the platform in their own way.
Despite valid concerns, DeFi technology is certainly a revolution in the financial sector. Even the possibility of decentralized financial models, giving users more control than they have ever had, is a groundbreaking one!
With the elimination of third parties, DeFi proves to be more quick, reliable, user-friendly, and cost-effective as the technology develops and evolves. All that remains to be seen is how quickly the rest of the world adopts it.
The future of finance has already begun!