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Understanding The Future of Finance

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The traditional finance system can be tricky enough to understand, with all of the different ways in which money is transferred and managed around the world. If we add the future of finance to the equation, it can be easy to feel confused by all of the new technologies talked about and jargon that is used.

In this post, we will discuss the future of finance in simple terms, to get a better understanding of how the financial industry is evolving. This will include a discussion around the concept of decentralization, blockchain, and cryptocurrencies, as well as a brief overview of decentralized finance applications (DeFi) and the ongoing debate about what the future of finance will look like.

Understanding the Future of Finance: Overview of Key Terms 

There are many different terms used when it comes to the future of finance. In this section we will talk more about decentralization, blockchain and cryptocurrencies.

Decentralization

Decentralization is not a new concept, but is a term that is being used more and more when describing a financial system that doesn’t rely on one central form of power to issue money.

For example, a bank is centralized, as all resources are contained within a single system, which includes all of the ways in which money is stored and transferred out of and within the bank itself. A decentralized financial system, on the other hand, doesn’t rely on a bank, but instead allows for the exchange of value (money) across peer to peer networks, such as the blockchain.

Blockchain

Blockchain is another term that is used, but which is not always properly understood, as the mechanisms that drive the creation of both blocks and chains are complex, and involve an understanding of different software and hardware principles.

However, simply put, blockchain is a decentralized way to store value, and share information. To follow on from the banking example used above, with blockchain, money can be transferred without having to involve a bank or pay any extra fees for getting a third party involved. This is because the structure of the blockchain network doesn’t rely on one entity for permission to exchange value.

Therefore, instead of asking a bank for money, or paying them to manage it, money can be exchanged along the blockchain through the use of smart contracts, which effectively automate financial transactions without having to involve third parties like a bank.

Cryptocurrencies

Now that we have discussed the concepts of decentralization and blockchain, we can now move onto understanding cryptocurrencies, which are the currencies used to exchange value, or money, on the blockchain network.

Bitcoin is one of the most well known cryptocurrencies, but Ethereum has also become more popular over the years, as well as LiteCoin.

Following on from the previous point, cryptocurrencies allow for the exchange of value on the blockchain, and are becoming more widely accepted as a general form of currency around the world, as they transcend any international monetary barriers and aren’t subject to intensive regulation (at least not yet).

Decentralized Finance Applications (DeFi)

With an understanding of the key terms, we can now move onto a discussion about the use of decentralized finance applications, also referred to as DeFi. As opposed to traditional finance applications, which are focused more on the interface of an application, and less on the protocols, DeFi applications are the exact opposite.

This means that DeFi applications are focused more on how the application works, instead of what it looks like. This is a powerful way to manage finances, as the very nature of these decentralized applications means that they are built and developed across shared networks. Therefore, there is not as much concern around owning the application interface (as is the case with traditional banking applications, for example).

This is a big shift from the top down approach that we currently experience within traditional finance systems, where the bank, for example, holds all the value. In addition to this, decentralized applications also make the exchange of value and money more efficient, as smart contracts allow for more seamless transactions (due to the nature of how the blockchain works).

DeFi also has many potential use cases, the most popular of which is currently money lending. As you can imagine, a largely unregulated industry means that there is the risk of fraud. However, the unregulated nature of the industry also means that there is so much opportunity for startups and innovation, without the need to go through traditional hierarchical systems, like banks, to launch a new financial product.

How Does The Future of Finance Look Like in Practice?

There are many debates around the future of finance. Some believe that decentralized applications will never take off, and some believe that they are paving the way towards a more fair and transparent financial industry.

Regardless of where you stand, there is no doubt that decentralized applications like blockchain, cryptocurrencies and DeFi are becoming more and more commonplace. in fact, in a world where the current pandemic is changing the way we think about everything, the future of finance is certainly going to look very different in the years ahead, as we are forced to think about more digital and efficient ways of doing business.

In the post above we have covered some of the broad terms that make up the future of finance, including decentralization, blockchain and cryptocurrencies. We have also given a brief overview of decentralized financial applications (DeFi) as well as provided a brief insight into the current debates going on in the industry.

While the future of finance remains to be seen, it is clear that there are many innovations that are happening in the world of finance, all of which could potentially change the way we think about exchanging value, and money, forever.