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Startup people are scrappy. They make do with the least resources. They bootstrap their way into the hearts of their customers.
Once they gain momentum, they need finance to sustain their momentum. And, once they’ve achieved sustainable momentum, they’ll need more finance to reach the growth stage — and then some more funding to reach the sustainable growth stage!
Apart from money, there are other financial products that are beneficial to startups like loan management, insurance, etc.
Now you must be thinking, what’s DeFi and how do I explore it for my startup?
Imagine, as an entrepreneur, you get access to the most advanced, robust, and secure financial products without any intermediaries like banks and financial institutions. Sounds like a dream, right?
Well, it’s not a dream anymore. It’s a reality — a reality created by DeFi (Decentralized Finance) that’s aiming to use technologies like Blockchain to remove intermediaries from the financial transactions between two parties.
That’s why you are in the right place. In this article, we’re going to get an overview of DeFi and how startups can leverage this financial system with a quick checklist ✅
It is a system where financial products are available to the public for use on a public decentralized network built on blockchain technology. This way they eliminate the need for middlemen like brokers, banks, and other financial institutions, which means the process to acquire financial products becomes short and simple.
So, how is this made possible?
Well, DeFi uses a software-based system that is written on blockchains for interaction between lenders, borrowers, buyers, and sellers. They are either interacting directly or through a software-based middleman, rather than a bank or a company or a financial facilitator.
The decentralized state of this system is achieved using multiple open-source technologies, blockchain, protocols, and proprietary software. Apart from the mix of these technologies, this financial system also uses unique self-executing contracts called Smart Contracts which basically automate agreements between buyers and sellers or lenders and borrowers.
Smart contracts are crucial to the success of this financial system.
Many people still place DeFi under the blockchain and cryptocurrency blankets, but the scope of this financial system is much wider.
DeFi fundamentally decentralizes the financial ecosystem and empowers everyone equally to acquire financial products in a secure way, which makes it quite important as it is. But, to really understand the implication of the decentralization of the financial ecosystem, we’ll need to take a look into the current state of affairs.
The current financial ecosystem is built on a hub and spokes model which means the power is centralized in the main hubs, like New York and London. Regional centers or mid-level powerhouses (spokes), like Mumbai and Milan, get a diluted version of the power. Nonetheless, they are quite important in the well-being of the entire financial ecosystem.
Now, the state of being — prosperity or hardship — travels from hubs to spokes and then to the rest of the global economy. Considering this, the major financial institutions and banks have set up their headquarters in the hubs and regional offices in the spokes, which means they hold a considerable stake in the entire economy.
We actually experienced this when the world was hit by The Great Recession not too long ago, where some problems in the balance sheet of these financial institutions started a domino effect and resulted in a global recession 👎
Even though blockchain technology is becoming mainstream these days, the DeFi, in itself, is still in the developing stage. It has not fully blossomed, which means there are parts of this financial system that are still in development.
So, it’s smart for both parties to go over a security checklist before signing Smart Contacts. Here’s a quick checklist you can follow before signing a Smart Contract.
Understand how the entire decentralized finance system actually works, connect with blockchain technology and DeFi experts, explore DeFi startups that are simplifying this entire process, and then opt for the right DeFi financial products for your startup.
Transacting using blockchain technology is immutable, which means once the transaction happens, it’s irreversible. At that point it doesn’t matter if there’s a mistake in the agreement of the smart contract or if the transaction itself is incorrect, since the errors can’t be reversed or can’t be easily corrected.
Smart contracts may be reliable, but coding errors and hacks are even more reliable ;)
So, even though the concept of DeFi is fascinating and its benefits are numerous, there are still some risks associated which means you need to be diligent every time you access this system.
Carl Torrence is a Content Marketer at Marketing Digest. His core expertise lies in developing data-driven content for brands, SaaS businesses, and agencies. In his free time, he enjoys binge-watching time-travel movies and listening to Linkin Park and Coldplay albums in the loop.
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