Zelcore Follow Mar 18
· 5 min read Blockchain technology has introduced new ways of conducting financial operations by utilizing the same solutions used for creating cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), without compromising user-privacy and charging additional fees.Developers quickly realized that if money can be used in the form of digital, decentralized currencies, why shouldn’t they try to implement the same concepts within the financial system and create a whole new, user-centric, decentralized financial framework.
Let’s take a look at how blockchain technology created DeFi and why it is a crucial part of the future of finance.
Blockchain Technology and Decentralization Decentralization is the key characteristic of blockchain technology that allows DeFi projects to entirely focus on users and cut out middlemen in the form of centralized payment providers and banks.
Blockchains don’t have central servers or network architecture that can be controlled by a single entity.Instead, a blockchain relies on thousands of independent but interconnected network nodes that constantly communicate with each other and share data.There aren’t any central validators that handle network traffic like in the case of centralized payment systems, such as Visa.
All blockchain transactions are checked and verified by network nodes and consensus mechanisms that are designed to make sure each transfer is legitimate.
The Proof of Work (PoW) and Proof of Stake (PoS) consensus models are some of the most popular blockchain models on the market.PoW networks use the computing power of network nodes, which are actually crypto miners, to verify transactions, while PoS chains use staked crypto assets to verify the validity of transactions.In case a node approves a fake transaction on a PoS chain, the node operator would lose all of their coins.
These decentralized validation mechanisms used by blockchains enable them to process huge amounts of traffic in short periods of time, while utilizing a trustless framework operated by smart contracts that make sure every transaction is authenticated.
This technology is vital for DeFi protocols, since developers don’t need huge resources to launch their apps, thanks to the decentralized, network sharing aspect of blockchains.Anyone can launch a DeFi Dapp on Ethereum, Avalanche (AVAX), Solana (SOL) or any other smart contract-based blockchain.
The Drawbacks of Traditional Finance With the introduction of blockchain technology, the slow processing time, unnecessary middlemen, bureaucracy, and high fees of traditional finance became painfully obvious for crypto enthusiasts.
For example, a transaction on the Solana and Avalanche blockchains takes a few seconds and these networks can process several tens of thousands of transfers per second, between users in any parts of the world, for a transaction fee that’s less than a dollar.
On the other hand, a classic international bank account transfer from one bank to another can take hours or even multiple business days when there are intermediary banks and payment processor services involved.Also, the transaction fees are dramatically higher and can even go as high as several percent of the transferred amount.
This is one of the biggest problems of traditional finance and blockchain technology solves it while cutting out all middlemen and extra fees.
Users want to be able to conduct their financial operations as fast as possible, with minimum fees, and that’s exactly what blockchain technology made possible.
Decentralized Finance and Blockchain Solutions DeFi platform developers utilize blockchain and cryptocurrencies to enable users to have true ownership over their funds and carry out various operations such as asset staking, borrowing, lending, and exchanging currencies in a matter of minutes, with their smartphones.
Instead of bureaucracy and extensive paperwork which are key characteristics of TradFi, DeFi platforms brought speed, cost-effectiveness and high accessibility to users.
This wouldn’t be possible without blockchains, since the processing capacities of centralized technology can’t compete with the delegated processing authority of decentralized networks.While a centralized banking system checks and approves transactions in the order they are initiated, with huge queues of pending transactions, blockchain based DeFi protocols can handle thousands of transfers per second by pooling together the processing power of network nodes.
DeFi users are able to connect their crypto wallets or exchange accounts with DeFi platforms and conduct cross-platform operations with just a few clicks.
The traditional financial system lacks the interconnectivity and versatility presented by DeFi apps, which is one of the key reasons for the massive expansion of blockchain technology into the financial services industry, with dozens of new projects launched on a daily basis.
It isn’t enough anymore to just provide banking services or currency exchange capabilities to users.In the era of Web 3.0 powered DeFi, users are looking for platforms that can satisfy all of their financial needs like Zelcore , which is both a highly secure, non-custodial, multi currency crypto wallet, a blockchain browser, and DeFi gateway that enables users to seamlessly conduct cross-chain swaps, trade on various exchange platforms, and manage their financial portfolio.
How Cryptocurrencies Power DeFi Protocols Every blockchain transaction is carried out with cryptocurrencies.When BTC was launched, each transaction’s sole purpose was to transfer funds from one address to another, but with the launch of smart contracts and DeFi platforms, crypto also became a medium for conducting data transactions.
In terms of DeFi protocols, when a user is staking their assets in a liquidity pool or borrowing stablecoins with crypto assets as collateral, these operations are powered by the native cryptocurrency of the blockchain that the DeFi app in question is based on.
Given the fact that crypto can’t exist beyond the blockchain, it’s easy to see how the DeFi industry is built on crypto solutions.
Conclusion DeFi is definitely on a rapid expansion path which is clear from the industry’s market capitalization, which went from 72 billion USD in February of 2021, to 106 billion USD by February of 2022 .However, the TradFi market is incomparably larger, which is a sign that DeFi still has a long way to go, before flipping the market dominance of classic financial mechanisms and institutions.
It’s worth noting that decentralized finance is still very young and developers are still exploring the various ways they can use blockchain technology to simplify financial services and expand the market..
