Finance is always a fascinating topic for everyone but at the same time, this field has the least innovation. Mankind is so old but until now there are only two big things involved in this sector, The first was the barter system and the Fiat system which followed, the last major innovation which led to the growth of the current financial system & traditional banking. The industry is in need of innovation. If we classify these last two innovations as Finance 1.0 & Finance 2.0, the next innovation in this industry is Finance 3.0.
Finance 3.0 will be there to solve the issues and problems of centralization, lack of transparency, high fees, and a system burdened by cumbersome red-tape that inhibits innovation. The Algorand Foundation believes that blockchain technology will open up Finance 3.0 (Decentralized Finance) and support an open, borderless economy. In this post, we are going deep into Finance 3.0, DeFi & the role of Algorand Blockchain.
Finance 3.0 is aiming to give control in the hands of users. The blockchain creates transparency, with the control of our data in our hands, unlike the current system where there is a lack of transparency, for example, we don’t generally know where our money is once we deposit it in banks. You will be able to track your money and when it comes to projects which are working to build this, the first name which comes to my mind is the Algorand Foundation who is actively promoting Finance 3.0 in various ways. A prominent idea to promote Finance 3.0 is the grant the Algorand Foundation awarded to LongHash Ventures for the Algorand Asia Accelerator program. Algorand Asia Accelerator aims to encourage and spur blockchain development in particular synergy with Finance 3.0 and beyond, empowering projects to build, grow, and foster financial innovations in the Algorand ecosystem. I have published an article on this program which is worth a read if you are more interested in the Algorand Asia Accelerator program.
DeFi is a hot topic today but this DeFi is just the start of Finance 3.0 revolution.
Decentralized Finance (DeFi)
What is DeFi?
DeFi refers to financial services using smart contracts, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology instead. Cryptocurrency’s promise is to make money and payments universally accessible– to anyone, no matter where they are in the world.
The Decentralized Finance (DeFi) or Open Finance movement takes that promise a step further. Imagine a global, open alternative to every financial service you use today — savings, loans, trading, insurance and more — accessible to anyone in the world with a smartphone and internet connection.
Smart contract are programs running on the blockchain that can execute automatically when certain conditions are met. These smart contracts enable developers to build far more sophisticated functionality than simply sending and receiving cryptocurrency. These programs are what we now call decentralized apps, or dapps. (Source Coinbase)
Why do we need DeFi?
Without any use case, DeFi can’t be called revolutionary. However, DeFi has many use cases and so much potential to provide a better financial system than the current Fiat financial system. The current financial system lacks transparency and places control with centralized banking and financial institutions. We need DeFi as it is brings transparency. DeFi does not require control by a financial institution – it uses dapps to automatically manage a transaction. In the world of trading for example, it would permit buyers and sellers of a share to set their price and trade without a broker or even a formal exchange. It’s that revolutionary. In finance, transparency and control are the most important thing and DeFi gives it 100% to users, so this is my explanation why we need DeFi.
What we can do in DeFi?
If we can’t take part in a revolution, it has less impact on our thoughts. But DeFi is not exclusive and is open for everyone. At the beginning of every revolution, there are limited things we can do in this field. People are going crazy and very excited about the future use case applications of DeFi and what it will bring to the financial services industry in the future. Currently, borrowing and lending is most popular but there are also options to earn interest on your deposits. Decentralized exchanges are also a huge industry in this there are so many great things coming in this field every day.
The Algorand Foundation is the core team behind the governance of the Algorand protocol and are working very hard to bring frictionless finance to everyone.
Algorand Foundation and Algorand Inc. recently announced the launch of comprehensive smart contract capabilities that will enable the creation of DeFi solutions and dApps that can scale to billions of users, tens of millions of daily transactions, with negligible transaction fees, all while taking advantage of the layer-1 benefits of the Algorand protocol. Unlike first-generation blockchains, Algorand's platform was designed from the ground up to power complex applications that require speed, scale, finality, and security, while being cost-effective and precise. (Source: PRNewswire)
Algorand's founder, Silvio Micali, unveiled a new set of smart contract capabilities that lowered transaction fees and ultimately make Algorand a faster and more efficient venue for DeFi-related activities – such as yield farming.
Algorand is DeFi ready!
Algorand's recent protocol release in August 2020 and the layer-1 smart contract release makes Algorand DeFi ready which is a game changing opportunity for Algorand and DeFi.
DeFi Limitations ?
We all know that the DeFi revolution started on Ethereum. DeFi is struggling to scale and offer the necessary speed and low fees on Ethereum. Ethereum has scalability shortcomings, it’s too slow when it comes to speed of transactions when we compare it with other blockchains and recent high fees is a limitation. It is really a big setback for this growing and flourishing ecosystem.
Solutions by Algorand
The only thing which is stopping Algorand to invite DeFi on blockchain has been solved with their recent updated smart contracts, enabled on layer-1. The recent protocol upgrade opens the door for the Algorand Blockchain for DeFi.
Algorand is highly scalable and does not suffer from scalability issues, enjoys a really high transaction speed and can handle over 86 million transactions a day. This volume is huge when compared with other blockchain's, such as Ethereum. In terms of fees, transaction costs are a mere 0.001 algo per transaction which is negligible.