The Future of Decentralized Finance: Blockchain Technology

4 min read

 

With the proliferation of innovative technologies, a new financial model constructed by the decentralized applications has been increasingly finding popular ground, offering an alternative system for larger masses around the world especially for those still lagging to be part of the global economy. Although existing financial system created massive wealth in the global scale, its shaky centralized services dependent on traditional and central banks are more accessible for the people who have already best connected to the financial centers of the world with the help of their economically advantageous positions and vicinity. As global wealth is increasing in favor of the more privileged people, it would not be fair to ignore the challenges resulting from the globally developing economy in favor of the people who currently can not access the financial services. However, as the impacts of boosting developments in technology and innovation sectors are going beyond the geographical boundaries, there have been alternative ways in which economically less privileged people can use to increase their wealth and thus, become new actors in a more decentralized economy. In this sense, the question is as follows; how can these people gain more access to the wealth building tools in the age of digitalization?

Today, the “pinnacle” of long term developments in technology and innovation sectors is the decentralized finance. This new financial model refers to the alternative financial system based on a public blockchain that is the technological infrastructure enabling transactions of data and values in a decentralized environment. The main reason why decentralized finance is mostly viewed by the international community as an alternative is that public blockchains proved to possess distinct features differentiating themselves from the centralized networks utilized mostly by the governments and traditional financial institutions.

As stated, the most prominent feature of public blockchains is its decentralized infrastructure. Indeed, when looking at the software industry as the development of previous decades, it is more likely to see some decentralized applications such as BitTorrent for sending or downloading files from one network to another. Similarly, people have for a long time benefited from semi-decentralized protocols through some e-mail services in terms of setting up their server. Recently, with the help of a peer-to-peer network of blockchains, it is possible to eliminate the number of risks resulting from the misuse of data being held centrally by the governments and banks. Since records are kept simultaneously across thousands of computers, the public key on the blockchain network enables data quality to be maintained by massive database replication and computational trust.

In parallel, permissionless and open structure of public blockchains give access to anyone in the world for managing self account and wallet on the blockchain network without any restriction imposed by a central authority regarding the people’s wealth, location or status, e.g. This means that applications can be added to the network without the approval or trust of any entity, but rather seeking a validation that contributes to the security and intactness of the decentralized services. Rather than claiming that blockchains would eliminate any current trust issue, it would be more fitting to say that they minimize the amount of trust required by any single actor in the system through distributing trust among different actors in the network according to the authenticity and validity issues in the Blockchain protocol.

Therefore, in such an “open-sourcing” financial system based on the utilization of public blockchains, more people can voluntarily and without the need of any consent of a third party, be part of the new open global markets.

Financial Inclusion by Decentralized Finance

Upon considering the main reasons for the people being excluded from formal financial systems; lack of necessary personal documentation such as ID, e.g. to open official bank account, the high entry-level funds required to access to financial services, and lastly the physical distance from economic and financial centers can be listed.

In this sense, the blockchain technology can provide digital identity to individuals with enhanced privacy, so that identity is restricted to devices as well as other individuals with access. For example, there are new platforms providing personal digital profile comprised of various records of financial and social activities of individuals. Since financial institutions recognize and accept this profile as a legitimate proof of identity, citizens who previously could not get access to the financial services due to the lack of provable identity, now can participate in the financial systems through their digital identities that would preserve its validity across borders. Some of the key startups empowering the concept of digital identity built on decentralized blockchain network are BanQu, Credits.vision, OneName, ShoCard and BitNation.

Decentralized finance can contribute to the financial inclusion and thus, social integration of people in the developing world by removing costly intermediaries in remittance services. In the current system, it’s highly challenging for the majority of the people to send money across borders because of the expensive remittance fees. However, decentralized financial services can reduce remittance fees below 3% by cutting operational costs through the vast amounts of small transactions in automatically shared database within the blockchain networks.  

Colendi

As a credit scoring and micro-credit platform, Colendi is also based on blockchain technology because of its features such as scalability, zero-knowledge proof, and decentralized storage. As opposed to the traditional banks’ methods to evaluate the potential borrowers’ creditworthiness, Colendi relies upon its decentralized scoring mechanism based on the blockchain network. Colendi’s algorithms consolidate the smartphone and social media data as well as transaction logs showing the repayment performance of the users. Therefore, Colendi offers a particularly important benefit for financially excluded people from formal financial systems through “fairly” calculated credit score and creditworthiness.

As stated, one of the most prominent reasons for some people not getting access to financial services such as bank accounts, credit cards, and cash transfers is the lack of provable identity. As reported by the World Bank in 2014, 18% of the unbanked could not get access to banking and financial services due to the lack of provable identity. In this sense, we’re very proud of talking about our Colendi project and its contributions to the aim of financial inclusion in today’s world. Among the other actors in newly emerged decentralized finance system, Colendi puts forth its difference with its numerous tools such as Colendi card, ID, token e.g. As the primary tool of our platform, Colendi ID is global, decentralized and autonomous financial passport including users’ relevant information in a private and protected model to provide fairly calculated credit score for them.

 

 

We will keep on working hard for the Colendi Project and keep you updated. Keep following us!

http://social.colendi.com/colendi-dapp

 

Sources

https://www.mycryptopedia.com/what-are-decentralized-finance-defi-applications/

https://www.visualcapitalist.com/decentralized-finance/

https://ethereumprice.org/updates/what-is-decentralized-finance-defi/

https://hackernoon.com/1-what-is-decentralizatio-terms-of-blockchain-technology-e266da2875c1

https://medium.com/@preethikasireddy/eli5-what-do-we-mean-by-blockchains-are-trustless-aa420635d5f6

http://www.worldbank.org/en/programs/id4d

https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/lu-blockchain-accelerate-financial-inclusion.pdf

 

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