The finance sector is among the most important sectors in a country. Money is needed in the payment of services and goods and it is the sole responsibility of the financial sector to regulate and facilitate movement of funds among people, act as a lubricant to the economy and equally transfer savings and outflows from the spending stream.
In the olden days, buying and selling began with trade by barter, which generally involves exchange of goods by goods. Cowries and animal skins in the stone age, to farm produces and of course the barter system in the agricultural age. Later, a fiat system payment was introduced which is characterised by paper currencies.
Money is controlled by the financial institutions (banks etc) which serves as a middlemen in the transfer of funds from someone to another. The smooth flow of money is one of the many building blocks in the world’s financial system. These financial institutions also help in the procurement of loans, savings, giving financial advice etc.
Despite the huge role performed by these financial institutions, there are limitations faced by these institutions such as lack of coordination, monopolistic market structure, inactive capital market, frauds, high interest rates, which pose threats to the economic growth of developing countries. This led to the disruptive innovative idea- an alternative finance system called Decentralized Finance (DEFi).
Decentralised finance is an open finance system that does not require a central entity such as brokerages, exchanges, or banks. The system is based on cryptography (cryptocurrency).
This type of finance ensures the merging of traditional bank services built on decentralized blockchain technology,which, in turn, triggers an open source, permissionless, flexible and transparent financial ecosystem.
UNISWAP: An example of DeFi
A good example of DEFi is Uniswap. Uniswap is an exchange built on the ethereum blockchain, which runs on a smart contract. It makes use of a mechanism called Automated Market Making, to automatically settle trades near the market price.
Uniswap is quite different from popular exchanges such as Binance. Also, any user can be a liquidity provider by providing liquidity in form of cryptocurrency to the uniswap smart contract and earning a share of the exchange fees known as pooling.
Africa is the Future of DeFi, Says Cardano Blockchain CEO
The CEO of IOHK, the developers behind the Cardano Blockchain, revealed that Africa is the future of DEFi during his YouTube missives. He states that:
“Who will be the consumers of DeFi? Who will be in the need of identity systems and payment services and new ways of representing equities? Will it be the ossified, highly regulated markets of the western world, which are invitation-only […] or will it be the agile and nimble countries of Africa, Southeast Asia, who have no incumbencies and are desperate to compete and thus, are open and friendly to retooling and ideas? Given that the human capital, physical capital, and economics are all moving in the right direction, it is my belief that Africa will be the most promising economic environment in the next ten years.”Charles Hoskinson, CEO, Cardano Blockchain
He further explained that there is $5.6 trillion locked up in DeFi across Africa and the Cardano Team is going to play a major role in capturing that value.
How will Africans benefit from DeFi?
Currently, in the crypto space, attention is being shifted to Decentralized finance. DeFi promises to bring the idea of traditional financial services back to the blockchain. Here are some of the benefits:
Borrowing and Lending:
DeFi borrowing and lending is made easy due to the simple, transparent and secure platform. Loans can be easily obtained by Africans without collateral and zero or little compound interests.
DeFi eliminates middlemen, thereby, making transactions and movement of funds easier and faster. This open-source attribute of DeFi helps promote innovation and encourages healthy competition, something that the cut-throat financial services industry desperately needs.
The financial institutions such as banks have access to the financial data of their customers, in which this data can be sold, exposed or hacked by external agents. This data is also being controlled by a small group of individuals which can lead to monopoly and control pricing.
With decentralised finance, all these aforementioned problems are solved. DeFi will ensure that customer’s data is democratized and secured, and it will create a rewards system that incentivizes market participants.
DeFi insurance platforms can help lessen risk. This insurance can be applied to digital wallets and smart contracts that are used to pool money for lending and staking.
There are several DeFi insurance providers that are all helping to create an ecosystem that is based on openness and accessibility. Their goal is to eliminate costly traditional insurance agencies that run as monopolies. This makes insurance more affordable and flexible to Africans.
About Cardano Blockchain
Cardano Blockchain is an open-source decentralised public blockchain and cryptocurrency project. It is the first blockchain platform to evolve out of a scientific philosophy and a research-first driven approach.
Cardano Blockchain is built in layers, a feature which promotes a flexibility that can be easily maintained and upgraded through soft forks. It has a unique approach to cryptocurrency which provides scalability and total security by having a layered architecture.
The goals of Cardano’s developers are to introduce a more secure way to conduct business, to provide the world’s unbanked population with access to financial services, and to also provide security and sustainability specifically applied to the dapps sector.