How is FinTech revolutionizing with blockchain technology
Are smart contracts revolutionizing our financial system?
Decentralized finance is a FinTech trend that has the potential to fundamentally change the financial system. A study shows. That the idea of a decentralized financial system based on blockchain technology is currently still in its infancy.
Technology has not only been an important factor for financial service providers since digitization. In the bank blog you will find studies on the most important trends and developments.
The basic idea behind the development of Decentralized Finance (DeFi) was to make sending money and granting credit as easy as sending a message - globally, independently of the institution and in real time. Because decentralized finance works completely without banks, payment service providers or other intermediaries and instead is based on blockchain technology.
In a current study by the digital association Bitkom, the current state of technology is assessed and classified. Decentralized finance is not a specific individual project, but the generic term for a large number of ideas and projects that aim to create a new, decentralized, transparent and trustworthy financial system. Until then, however, suitable answers would have to be found to a number of technical, economic and regulatory questions.
The smart contracts principle of decentralized finance
Bitcoin and Ethereum, both of which use blockchain technology, form the technical basis for decentralized finance. Ethereum was launched five years ago and, thanks to an implemented programming language, enabled so-called smart contracts for the first time.
These are intelligent contracts that could already set payment conditions for a transaction, which would then be automatically entered into, without the intervention of third parties, if the agreed prerequisites were met. In this way, unlike the banking principle, the transaction is completely protected from manipulation by third parties.
Decentralized Finance: Great Potential with HurdlesThe decisive difference to the existing financial system is not only that everyone can participate regardless of origin or social status. Every single transaction in this financial system is also transparent. - Julian Grigo, Bitkom digital association
On the basis of these smart contracts, a completely new financial system could be built in the near future. However, even this would not be free of technical risks, such as programming errors within the contracts. Even a complicated operation, which could deter potential users, could become an obstacle during the introduction. Last but not least, there is a residual risk of the parent organization of the individual DeFi projects exerting influence on not yet fully decentralized technical solutions.
In addition, the consequences of a lack of scalability and liquidity bottlenecks, such as at the beginning of the Corona crisis, as well as the question of regulation, would have to be looked more closely. All in all, decentralized finance still has a long way to go, but also enormous potential. So far, the question of how DeFi can be regulated and how established financial service providers will position themselves in relation to this rapidly growing technology has so far been completely unresolved.
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