What are decentralized finances, the solution that promises to solve the two problems

Decentralization could impact personal finance, according to experts who advocate for it. The quest to eliminate "the human factor" is part of an equation.

The financial world linked to the technological environment is expanding by leaps and bounds. According to the Financial Inclusion report of the Central Bank of the Argentine Republic (BCRA), in June 2021 a record of more than 8.5 operations per adult was reached with electronic means of payment, such as debit and credit cards or digital transfers. Compared to the same period in 2020, total operations grew by 40 percent.

In addition, in May 2019, for every 100 cash withdrawals, 169 electronic payment operations were made, while in May 2020 they increased to 221 and in May 2021 they reached 310. Meanwhile, payments with digital wallets using QR codes increased 136 percent in quantity and 140 percent in actual amounts in 2021 compared to the average values ​​of 2019 and 2020.

However, this advance continues to be located within the ecosystem of conventional finance, made up of financial institutions, such as banks, stock exchanges and brokers, which allow lending and receiving money and exchanging financial assets, among other more sophisticated activities, with the active participation, and essential of a central counterparty.

The real change would come from the hand of decentralized finance (DeFi, in English), which includes the use of the chain of blocks (blockchain, in English) and other computer processes that are expected to revolutionize the sector.

The Advantages of Defi

At first glance, it might seem that decentralized finance does not provide much more than a computer change, however, the correct implementation could have a very positive impact on the economy of society.

First of all, Cavazzoli stresses that all operations and value transfers carried out in the DeFi Development Company environment are public and verifiable, which provides "unprecedented transparency", which translates into high security and reliability.

In this framework, Apezteguia 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 an encrypted way. In addition, only the public addresses in which the assets that are part of each transaction are hosted are disclosed, so the parties maintain their privacy.

On the other hand, as it is a solid construction of computer codes that automate operations, the risks are only found in failures or vulnerabilities, but not in the system itself, which guarantees the effectiveness of the exchanges. Likewise, by having high interoperability and dispensing with financial intermediaries, the ecosystem is highly efficient.

The ability to cross borders that DeFi offers is linked to the lack of central counterparties that are tied to the rules and laws of each region, as well as to their own systems that they must use.

Specifically, the great change that the arrival of decentralized finance represents is the greater financial inclusion that will take place in the world. In this sense, Federico Ast points out that "this inclusion potential that DeFi has is spectacular and gives literally everyone opportunities to participate in the financial system."

To practically demonstrate the potential of DeFi, the entrepreneur behind Kleros exposes some day-to-day cases: "A man who is in Argentina and does not have access to any investment tool and today has a few dollars left over, instead of put them on the mattress, you can place them in a lending application (loans) and thus start charging for your deposit or you can start trading crypto assets and investing in different projects.

On the other hand, Marcelo Cavazzoli expresses: "On a day-to-day basis, you can pay in a supermarket with a currency issued by private companies or you can take out a loan to be able to change your car without having to go to a bank. These are some of the most common examples that today can already be done, but that in the coming years will be something common".

Still Need Development

Despite its potential, in these times, the decentralized finance ecosystem is not perfect. On the one hand, the applications are still new and have a long way to go to improve and optimize them, mainly because the interfaces must be even more intuitive for the average user. In Ast's words, "you still have to be in the crypto world to use these tools and they are not available to everyone."

Regarding the short development time, Cavazzoli adds: "We must bear in mind that it is a technology that, although it has been strengthening and growing a lot in recent years, is still relatively new. The risk of finding vulnerability in the code of a smart contract it exists and that is why it is very important to operate in those protocols that have had a security audit or that has been active for several years and have demonstrated certain robustness".

Also, transaction costs have to come down a bit more for DeFi Development to finally materialize , as Ethereum, the main network used in the field, is still somewhat expensive, even though its next upgrade, Ethereum 2.0, is try to solve this problem.

Future Promises

In any case, despite these drawbacks, decentralized finances have an attractive future ahead of them and aim to camouflage themselves in society as one more of the thousands of tools that people use to have a better quality of life.

In this regard, Cavazzoli, the mind behind Lemon Cash, predicts: "I see this ecosystem being something common among all of us, as is the internet today. Nobody questions how it works or what it is, we simply use it because it makes us life easier. Cryptocurrencies and the DeFi ecosystem make our lives easier, and in the long run it will end up penetrating all levels of society."

Accompanying the optimistic view, the director of Kleros adds: "In the future, people will not really know that they are going to be using DeFi, each one will use their application and behind the structure it will be DeFi, crypto, peer to peer, but people do not will know as well as we don't know how the Android that we have behind in the phone works".

Finally, he says, "If I want to open a hot dog business and I need a credit of $1,000, a bank is not going to provide it to me today since it does not exist, but in one of these DeFi Token Development apps, you will undoubtedly be able to access to credits of tiny quantities."