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Decentralized Finance: An Emerging Alternative to the Global Financial System

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Decentralized Finance: An Emerging Alternative to the Global Financial System

Decentralized Finance: An Emerging Alternative

The global financial system has created massive wealth, but its centralized nature means the spoils have gone to the people who are best connected to the financial centers of the world.

As global inequality continues to rise, how can wealth building tools become more accessible to the rest of the global population?

Luckily, technological developments and their rapid adoption make this the right time for a new decentralized financial system to emerge:

  • The Internet: 3.9 billion users by the end of 2018
  • The proliferation of smartphones: Two-thirds of the unbanked have mobile phones
  • Digital banking: over 2 billion users by end of 2018
  • Bitcoin and Blockchain: the emergence of new public blockchains

Today’s infographic comes to us from investment app Abra, and it highlights how public blockchains could help to enable a decentralized finance system.

What is Decentralized Finance?

Decentralized finance describes a new decentralized financial system that is built on public blockchains like Bitcoin and Ethereum. After all, Bitcoin and Ethereum aren’t just digital currencies — they’re foundational open source networks that could be used to change how the global economy works.

There are six primary features that differentiate public blockchains from the private networks used by governments and traditional financial institutions:

  • Permissionless: Anyone in the world can connect to the network
  • Decentralized: Records are kept simultaneously across thousands of computers
  • Trustless: A central party isn’t required to ensure transactions are valid
  • Transparent: All transactions are publicly auditable
  • Censorship Resistant: A central party cannot invalidate user transactions
  • Programmable: Developers can program business logic into low-cost financial services

In such a financial system, users will have access to apps that use public blockchains to participate in new open global markets – but how would this shape the global financial system for the better?

The Potential Impact of Decentralized Finance

Here are five ways that decentralized finance will have an impact on the world:

1. Wider Global Access to Financial Services

With decentralized finance, anyone with an internet connection and a smartphone could access financial services. There are a variety of barriers that prevent access in the current system:

  • Status: Lack of citizenship, documentation, credentials, etc.
  • Wealth: High entry-level funds required to access financial services
  • Location: Vast distance from functioning economies and financial service providers

In a decentralized financial system, a top trader at a financial firm would have the same level of access as a farmer in a remote region of India.

2. Affordable Cross-Border Payments

Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.

In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%.

3. Improved Privacy and Security

In decentralized finance, users have custody of their wealth and can transact securely without validation from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.

4. Censorship-Resistant Transactions

In a decentralized financial system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.

In places with poor governance and authoritarianism, users can divest to the decentralized financial system to protect their wealth. For example, Venezuelans are already adopting Bitcoin to protect their wealth from government manipulation and hyperinflation.

5. Simple Use

Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system.

With a decentralized system, a woman in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.

The Potential Blue Sky

Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces their centralized counterparts.

But what if they can co-exist?

Public blockchains can interact with the traditional financial system to create a new hybrid model:

  • Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system.
  • Users could hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.

Like the internet with knowledge, decentralized finance could help democratize the financial system.

But will we allow it?

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Bitcoin

Mapping the Major Bitcoin Forks

Bitcoin forks play a key role in Bitcoin’s evolution as a blockchain. While some have sparked controversy, most Bitcoin forks have been a sign of growth.

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Mapping the Major Bitcoin Forks

The emergence of Bitcoin took the world by storm through its simplicity and innovation. Yet, plenty of confusion remains around the term itself.

The Bitcoin blockchain—not to be confused with the bitcoin cryptocurrency—involves a vast global network of computers operating on the same distributed database to process massive volumes of data every second.

These transactions tell the network how to alter this distributed database in real-time, which makes it crucial for everyone to agree on how these changes should be applied. When the community can’t come to a mutual agreement on what changes, or when such rule changes should take effect, it results in a blockchain fork.

Today’s unique subway-style map by Bitcoin Magazine shows the dramatic and major forks that have occurred for Bitcoin. But what exactly is a Blockchain fork?

Types of Blockchain Forks

Forks are common practice in the software industry and happen for one of two reasons:

  • Split consensus within the community
    These forks are generally disregarded by the community because they are temporary, except in extreme cases. The longer of the two chains is used to continue building the blockchain.
  • Changes to the underlying rules of the blockchain
    A permanent fork which requires an upgrade to the current software in order to continue participating in the network.

There are four major types of forks that can occur:

1. Soft Forks

Soft forks are like gradual software upgrades—bug fixes, security checks, and new features—for those that upgrade right away.

These forks are “backwards compatible” with the older software; users who haven’t upgraded still have access to the network but may not be able to use all functionality in the current version.

2. Hard Forks

Hard forks are like a new OS release—upgrading is mandatory to continue using the software. Because of this, hard forks aren’t compatible with older versions of the network.

Hard forks are a permanent division of the blockchain. As long as enough people support both chains, however, they will both continue to exist.

The three types of hard forks are:

  • Planned
    Scheduled upgrades to the network, giving users a chance to prepare. These forks typically involve abandoning the old chain.
  • Contentious
    Caused by disagreements in the community, forming a new chain. This usually involves major changes to the code.
  • Spin-off Coins
    Changes to Bitcoin’s code that create new coins. Litecoin is an example of this—key changes included reducing mining time from 10 minutes to 2.5 minutes, and increasing the coin supply from 21 million to 84 million.

3. Codebase Forks

Codebase forks copy the Bitcoin code, allowing developers to make minor tweaks without having to develop the entire blockchain code from scratch. Codebase forks can create a new cryptocurrency or cause unintentional blockchain forks.

4. Blockchain Forks

Blockchain forks involve branching or splitting a blockchain’s whole transaction history. Outcomes range from “orphan” blocks to new cryptocurrencies.

Splitting off the Bitcoin network to form a new currency is much like a religious schism—while most of the characteristics and history are preserved, a fork causes the new network to develop a distinct identity.

Summarizing Major Bitcoin Forks

Descriptions of major forks that have occurred in the Bitcoin blockchain:

  • Bitcoin / Bitcoin Core
    The first iteration of Bitcoin was launched by Satoshi Nakamoto in 2009. Future generations of Bitcoin (aka Bitcoin 0.1.0) were renamed Bitcoin Core, or Bitcore, as other blockchains and codebases formed.
  • BTC1
    A codebase fork of Bitcoin. Developers released a hard fork protocol called Segwit2x, with the intention of having all Bitcoin users eventually migrate to the Segwit2x protocol. However, it failed to gain traction and is now considered defunct.
  • Bitcoin ABC
    Also a codebase fork of Bitcoin, Bitcoin ABC was intentionally designed to be incompatible with all Bitcoin iterations at some point. ABC branched off to form Bitcoin Cash in 2017.
  • Bitcoin Gold, Bitcoin Diamond, Other Fork Coins
    After the successful yet contentious launch of Bitcoin Cash, other fork coins began to emerge. Unlike the disagreement surrounding Bitcoin Cash, most were simply regarded as a way to create new coins.

Some of the above forks were largely driven by ideology (BTC1), some because of mixed consensus on which direction to take a hard fork (Bitcoin ABC), while others were mainly profit-driven (Bitcoin Clashic)—or a mix of all three.

Where’s the Next Fork in the Road?

Forks are considered an inevitability in the blockchain community. Many believe that forks help ensure that everyone involved—developers, miners, and investors—all have a say when disagreements occur.

Bitcoin has seen its fair share of ups and downs. Crypto investors should be aware that Bitcoin, as both a protocol and a currency, is complex and always evolving. Even among experts, there is disagreement on what constitutes a soft or hard fork, and how certain geopolitical events have played a role in Bitcoin’s evolution.

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Bitcoin

The Beginning of a Bitcoin Bull Run?

After 15 months of losses and stagnation, Bitcoin has made a miraculous recovery — going on a 150% bull run since its lows in December 2018.

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The Beginning of a Bitcoin Bull Run?

After 15 months of losses and stagnation, Bitcoin has made a miraculous recovery — rising more than 150% from its lowest point in December 2018.

In its heyday, Bitcoin had surpassed $10,000 in early December 2017, before briefly crossing the $20,000 mark for a single day on December 17th. A year later, the digital currency had fallen back to Earth, dropping below $3,200.

Now that the dust of that wild speculative frenzy has settled, Bitcoin is back on the upswing. What could be causing this most recent surge in growth?

We look at four possible explanations for the Bitcoin bull run, as originally outlined by Aaron Hankin at MarketWatch:

Technical Milestones

Bitcoin has seen several technical milestones this year, such as surpassing the psychological barrier of $5,000 in early 2019, breaking the 200-day moving average, and scoring the golden cross (when the 50-day moving average crosses above the 200-day moving average).

Widespread Adoption

Bitcoin is experiencing a steady increase in adoption across several markets. The term Bitcoin has become a household name — even if people don’t understand what it does, they know what it is.

Companies such as Starbucks, Microsoft, and Amazon, and Nordstrom are looking for ways to integrate cryptocurrencies into daily transactions for faster payment clearance, innovative rewards programs, and efficient customer service interactions.

bitcoin merchants

Shifting Sentiments

Bitcoin has possibly seen a shift in public perception. There have been fewer negative articles about Bitcoin and cryptocurrencies, and the news stories that are negative no longer have as big of an impact as they once did.

When Binance announced hackers stole $40 million in bitcoin and when accusations of an $850-million cover-up were leveled against Bitfinex and Tether, the Bitcoin bull run barely flinched and continued to climb.

Wavering Gold Investment

Investor confidence in gold has been more stagnant in recent times. To capitalize on this, Grayscale Investments (of Digital Currency Group) posted a campaign in May 2019 promoting Bitcoin as an ideal alternative to gold because it is borderless, secure, and more efficient for storing value.

Despite the World Gold Council’s response denying those claims, the Grayscale Bitcoin Trust saw OTC Markets Group’s highest trading volumes five days later.

Where to from here?

After a long skid, it appears Bitcoin is showing signs of life again. Bitcoin’s price can be highly volatile, so it remains to be seen whether this is the beginning of a bull run, or whether this is just another bump in the roller coaster ride.

Editor’s note: The price of Bitcoin has fallen to $7,100 at time of publishing and will likely continue to experience extreme volatility. However, even at a price of $7,100, this is still a 120% increase from lows in Dec 2018. As well, an earlier version of this graphic had incorrect dates on the timeline. That has now been corrected.

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