What is decentralised finance?
Traditional currencies are controlled and governed by centralised bodies. Here in Australia, this body is the Reserve Bank of Australia, which is responsible for the printing of Australian currency and controlling inflation.
As we move towards a cashless society, however, the traditional rules and systems of finance are rapidly evolving, and a more decentralised model is taking over. Nowhere is this more prominent than in the world of digital currencies, which, by its very nature, is decentralised.
So what is decentralised finance and how is it different to centralised finance?
To understand this, let’s first examine the difference between digital and traditional currency. Digital currency is virtual, meaning that it does not physically exist in the same way that traditional coins or notes do. Traditional currency is typically held in a bank account and each bank is responsible for keeping a ledger of all transactions in and out of each separate bank account. For digital currencies, a universal, decentralised system known as Blockchain (originally developed for the first digital currency, Bitcoin) replaces this as the central ledger for all transactions.
Why is Blockchain and decentralised finance more efficient than traditional banking?
Imagine the following scenario – you want to send some money to a relative in England. To do this with traditional currency, you would need to pay your bank’s exchange rate to convert your money from Australian Dollars to British Pounds, plus a transaction fee for sending the money. You would also have to wait up to 5 business days for the transaction to clear. With many digital currencies you can make transactions for free with virtually instant transaction speeds.
Why is decentralised finance more efficient?
If you were to send digital currency as opposed to traditional money, you would not have to worry about:
– Fluctuating exchange rates
– Transaction fees
– Time for funds to clear
It is also not reliant on either sender or recipient of funds being the holder of a traditional bank account, all you need is a mobile phone. It is for this reason that it has become so popular in the developing world, where many people do not have access to traditional banking facilities.
It’s not hard to see why Blockchain and decentralised finance is increasingly being embraced, and the many ways it will make life easier for citizens all over the globe.