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What would a world without banks look like?

A new form of finance backed by cryptocurrencies and operating without the intermediary of banks: is it really utopian?

15/07/2022



Traditional banks are the foundation of our current economic and financial system. They have ensured its stability and functioning for centuries. However, in the last few years, an alternative banking model has been emerging before our eyes: Decentralized Finance.



Crypto-currencies, an endless debate


Since the creation of Bitcoin in 2008, crypto-currencies have been met with derision by the traditional financial industry. The reason Bitcoin is so criticized is because it challenges the way our current financial systems work, which have not been challenged in decades or even centuries. The philosophical idea behind Bitcoin is to act as a currency free from the control of financial institutions and central banks. Its goal is to build a fairer and more stable economy without the interface of the state.


The number of crypto-currency holders is exploding globally and the total capitalization of crypto markets recently surpassed the $3 trillion mark for the first time in its history. Faced with this surge in crypto-currency prices, their detractors point to their purely speculative utility. On the other hand, their defenders see an entirely different interest: the construction of a whole new system.



Blockchain and decentralization


Crypto-currencies are based on blockchain technology which is decentralized in nature. Transactions are uniquely recorded in databases on a multitude of different computers. The Blockchain is intended to be transparent. Everyone is free to consult all the transactions made on the Internet at any time.


Decentralization is one of the reasons why the Bitcoin network is so hard to destroy. No one is in control of this virtual currency. It is almost impossible to act fraudulently against it or to change its rules. For example, even if a government were to seize a group of computers that support Bitcoin, the network will continue to function because a multitude of other computers will have kept a complete record of transactions.



The advent of Decentralized Finance


A few years after the creation of Bitcoin, some people wanted to take this concept of decentralization even further. They imagined a world without banks, i.e. a world where all the services offered by our bankers (savings, loans, currency exchange, insurance, etc.) would be self-managed without the intervention of intermediaries. Transactions would be carried out from one individual to another in an almost instantaneous manner. This world is called Decentralized Finance, or DeFi for short.


The automation of the services offered by DeFi is made possible by computer technology. The transactions are made in crypto-currencies and are managed between computers thanks to the Blockchain. This technology allows the generation of contracts that can be described as self-executing. These contracts are programmed so that they are automatically triggered on a predetermined event. This is what we call Smart Contracts. These contracts replace the banks for the different financial transactions as well as the whole legal arsenal such as lawyers and regulators that we usually trust in case of breach of contract.



What are the advantages of DeFi ?


Like crypto-currencies, Decentralized Finance is public and open to all. Given its anonymous nature, its users do not need to communicate any personal information. Thus, anyone with an Internet connection and an address on a compatible Blockchain can access it. With nearly 2 billion people in the world without access to banking services, DeFi can be a real opportunity for many.


Decentralized Finance aims to be a fairer and more equitable finance. Since it does not use intermediaries, it does not have the heavy costs of traditional finance such as bankers' salaries, lavish office rent, etc. The costs of financial services on DeFi are therefore drastically reduced for its users.


Last but not least, Decentralized Finance is resilient. Since it relies on Blockchain technology whose infrastructure is immutable and unfalsifiable, DeFi demonstrates an unparalleled level of security to provide financial services.



What future for DeFi ?


Although we live in an increasingly technology-driven world, we will always need intermediaries. DeFi will probably not replace them. On the other hand, the activities that rely on intermediaries may eventually be replaced by new types of intermediaries whose processes will be fully automated.


Silently and before our eyes, a transformation of our banking system is taking place. Decentralized Finance is now worth more than 100 billion dollars and seems to be only at the beginning of its development. However, DeFi remains a young ecosystem that is still difficult to grasp for a public new to crypto-currencies. It requires time to learn the technical basics as well as risk management. This is why Ambrosia wants to bring the benefits of Decentralized Finance to the common man.

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