Traditional finance entails the physical means through which humans transact amongst each other. It includes the ancient trade by barter system as well as the modern system of using a common centralized currency to transact.
The traditional financial domain is centralized. Central authorities issue currencies and guidelines which drive the economy and are used for local and global trades. These central authorities, called central banks, also control the supply of money to the economy.
In the early stages of the use of the traditional financial system, central authorities supplied money to the economy by holding Gold as backup assets. This system continued until 1971 when Central Banks ceased to back up the currencies with Gold and the world moved to a new monetary system.
With the cessation of the system of backing up currencies to Gold, the new monetary system paved way for the perpetration of discrepancies by the central banks. This was possible given the fact that the power of managing and regulating the demand and supply of the currencies lie with them. To entice financial users, these banks implore users to give up the control of their address to them with the expectations of getting high returns. The problem with this enticement is that it comes with high risk since the control of the funds and assets is centralized.
Over the years, the traditional financial system has shown increasingly significant flaws. These include the susceptibility of users' funds to inflation, devaluation of currencies, negative interest rates, exclusion of a large part of the populace, difficulty of access and lengthy wait time. To tackle these flaws, a new monetary system known as Decentralized Finance was designed.
Decentralized Finance (DeFi)
Decentralized Finance is a new monetary system of transaction which is built on the blockchain technology. It encompasses protocols, digital assets, dApps and smart contracts components which are built on Blockchain. Blockchain are immutable databases of recorded transactions that are shared across networks of computers called nodes. Utilizing the blockchain technology, the decentralized financial system propagates transactions through a network and offers users a world of open, globally accessible financial services ranging from peer-to-peer loans and trading to saving and insurance.
A major advantage of Decentralized Finance is that it offers financial users a system that removes all layers of intermediaries and middlemen — banks and other financial institutions — that are present in the traditional financial system. This is made possible through the use of smart contracts which ensure that the control of money and assets lies completely with the individual owners. Also, this new system enables a higher proportion of the populace to access financial services. This proportion includes the over 1.7 billion people who lacked access to banking services with the traditional financial system.
Decentralized Finance also promotes open banking through the inclusion of decentralized financial technologies which ensures that there is no point of failure for identical records that have been kept across multiple computers through peer-to-peer networks. It also provides users with equal benefits for borrowing and lending including high-yield interest incomes and low interest loans. However, this system has its flaws as well.
A major flaw of most DeFi platforms is that they are either slow or permissioned. The slowness of the blockchains prevents them from being able to handle the enormous amount of transactions that flows into the economy daily. Also, the permissioned status of the blockchains concentrates power in the hand of a few players and therefore defeats the purpose of decentralization.
Another distinct flaw of the DeFi system is that it is extremely volatile. To tackle this volatility, certain DeFi platforms designed the use of stable coins. However, regulatory compliance is still a major hurdle with the use of these coins. These flaws and other numerous ones limit the reach of this new monetary system.
Algorand as the Bridge between Traditional Finance and Decentralized Finance
The Algorand Blockchain was founded by Turin award winner, Silvio Micali, and his team in 2017 to counter the flaws posed by both Traditional Finance and Decentralized Finance. The blockchain combines the advantageous parts of both systems to offer users a platform that enables frictionless financial services for a borderless economy.
To start with, Algorand is the first scalable and permissionless blockchain. It ensures scalability and security; the barriers that have undermined the adoption of mainstream blockchain for years. The blockchain's pure Proof-of-Stake protocol (PPoS) consensus protocol is built on the Byzantine Agreement which makes it permissionless. This ensures that the system can reach consensus without requiring a central authority and tolerate malicious users so far the majority of the stakes are in non-malicious hands.
On one hand, Algorand exhibits the advantageous parts of the aforementioned systems. With its blocks formalized in seconds, transactions throughput on Algorand is on par with large payment and financial services in similarity to the traditional financial system. It also exhibits true decentralization in similarity to DeFi. The approval of every block of node bring run by entities across different countries is done by a unique committee of users who are randomly and secretly selected. This helps to ensure accuracy, fairness and transparency as there is no powerful central authority or single point of controls.
On the other hand, it also solves the flaws of both Traditional and Decentralized Finance. In contrast to the traditional system, the Algorand architecture is accessible, secure and trustworthy. The trustworthiness is built from the decentralization which ensures that the system is fault tolerant. Also, the blockchain is permission-less, has minimal processing costs and is open to all in contrast to the existing DeFi system. Users do not need the approval of a trusted authority to transact on the blockchain. The minimal computational costs and IT resources utilized by the blockchain enables it to offer low-cost services to its users.
The digital world today requires a secure, seamless and scalable way to transfer currency, safeguard assets and perform other transactions without intermediaries. This results in the implementation of Traditional Finance and later, Decentralized Finance. These financial systems however come with their intricate flaws which were tackled by the Algorand blockchain. To prevent experiencing the hassles associated with these flaws, Crypto enthusiasts and Blockchain developers especially in countries like Nigeria where assets are susceptible to increasing inflation rate of Traditional Finance currencies and volatility of DeFi should make use of the Algorand blockchain to safeguard their assets and perform transactions.