Emerging technology is reshaping the world of finance to a completely new level. The terms like “open finance” and “decentralized finance” refer to a more democratized system of dealing with funds. Let’s explore fintech more closely from the perspective of blockchain usage.
Blockchain is available to everyone who wants to invest, as opposed to the old financial system. Back in the day, there would be no other way of investing than contacting a wealth manager or a brokerage firm. The reason for that is simple. The amounts needed for investing started at very high stakes and single individuals often couldn’t participate on their own. Also, to invest in stocks, you had to be an accredited investor. Wealth managers often created generalized portfolios consisting of the funds of many investors. As a result, the returns on investment were much dependent on the expertise of the particular manager as well as the average number that the investor obtained, out of all the portfolio.
The emergence of instant trading technology, and decentralized trading on a blockchain in particular, totally revolutionized the investment vehicle. Now, investors of any kind, no matter how small or how big they are, can be responsible for their own funds. They are free to invest in whichever assets they like in any amount and for the term that they feel comfortable with. Also, they can use a few services at the same time and they aren’t dependent on dividends from only one source. DeFi is a fairly young industry, yet it grows very quickly. That’s why, right now, you aren’t tied to just Bitcoin and Ether. Instead, you can invest in dozens of other high-performance tokens. At the time of writing, nearly 10,000 cryptocurrencies exist in the world. What’s more, all the data on their performance is available online for free. You can visit a specialized resource displaying the information you need for thorough analysis and drawing the appropriate conclusions of whether or not you should invest in that coin.
The absence of intermediaries in blockchain investing is beneficial for a few reasons. First, the investor can save funds because they don’t have to pay managers and brokers for handling their investments. Second of all, the operations on a blockchain are completely transparent. It is easy to see where your money goes. There is also the freedom of doing anything you like with your portfolio at any given moment of time and easily access all the necessary data. The only thing that’s left to do is to become responsible for your own money. Because if you are not cautious enough, there won’t be anyone else to blame for the failure.
In the old banking system, money transfers are taking a few days and subject to fees from multiple intermediaries. When it comes to lending and deposits, the bank comes as the ultimate authority and their customer is helpless if the bank’s policy is unfavorable to them.
In a blockchain, financial services are gaining popularity because of the exclusion of intermediaries, low fees, and the complete absence of KYC procedures and things like credit ratings. Anyone can take a loan with the cryptocurrency collateral regardless of their location, documents, and previous history. These services are especially demanded in the so-called “unbanked territories” where the vast majority of the population don’t use plastic cards and don’t have accounts in banks at all. All the user has to know is how to buy a Zilliqa coin or any other token of their interest.
Ethereum blockchain has become home to most of the decentralized financial services called dApps. In these applications, the money transfers are secured and moved with the help of pre-programmed pieces of code – smart contracts. This reduces the chance for human error, moral hazard, and selection bias.
In the world of traditional finance, people who needed insurance the most were often rejected because their cases were unfavorable for insurance companies. Such a situation is a clear example of selection bias. Or else, they could be charged an extremely high insurance rate that was too expensive to handle. All of these problems don’t exist on the blockchain because the insurance is automated by smart contracts.
Of course, trading is one of the most popular services in fintech. Both individual and institutional traders create markets that have trillions of dollars of trading volumes. That’s why these markets are highly lucrative. Since they operate 24/7 and everyone can participate even with the smallest amounts, lots of traders around the world take chances and some of them even manage to make their living solely on trading.
Blockchain contributes to the overall trading picture by the creation of DEX – decentralized exchanges. All of their operations are happening on the blockchain which attracts millions of users from all over the world. Since most blockchains have open code and fully public ledger, traders tend to trust such exchanges because they can see the money flow in real-time.
While blockchain in fintech is quite a revolutionary and attractive concept, it is still very new to a wide audience. No wonder that some of the networks experience problems with DDoS attacks, as well as funds theft by hackers. Also, some users may not figure out how the crypto wallets work and send money to an unknown address. Such funds are generally getting lost in the blockchain and the previous owner can never get them back since there is no such thing as a refund on a blockchain. That’s why all the new users should be extremely cautious when using the new fintech services. Also, they should perform thorough research before investing because usually, emerging financial markets are highly volatile and prone to an increased risk.