When you think about Decentralized Finance (DeFi), the first thing that comes to mind is probably cryptocurrency. This makes sense, because DeFi depends on blockchain technology that emerged with Bitcoin. Its applications, however, go far beyond cryptocurrency trading.
A recent TechBullion article describes blockchain as “a decentralized system of storing and sharing data that eliminates the need for intermediaries, making transactions more secure, efficient, and transparent.”
With DeFi platforms, a centralized authority does not exist. Instead, ledger technology distributes authority and allocates more power and control to individual people. That's an important change because centralized systems can limit the speed and sophistication of services provided.
Consensus protocols are a blockchain’s set of rules that are agreed to be “true” by users and are designed to resist tampering, according to “DeFi and the Future of Finance,” a book first published in 2021.
PoW (Proof of Work), for example, is the consensus protocol used by Bitcoin and Ethereum. This protocol is based on a competition of computational power, and participants agree that the longest chain of blocks is “true.” It requires a massive amount of network power to solve complex cryptographic puzzles. The first node to complete them can add another block of data to the chain.
According to the book, it would be extremely difficult for any entity to cheat this system. Attackers would need to acquire the majority of network power (called the “hash rate”) to outpace all the other competition and manipulate the longest chain of code.
One key benefit of blockchain technology is the transparency provided through chain of custody validation. That is, the ability to independently verify how, when, and by whom transactions, commodities, and contracts are handled through open source code.
For supply chain management, blockchain allows “a set number of known parties to conduct transactions with one another directly while improving security, ensuring contract compliance and reducing costs,” according to Forbes.
With this application of DeFi, formerly burdensome documentation processes are built in. By decentralizing data, high stakes industries can help build trust, reduce fraud, and streamline global transaction processes.
Propy Title Agency is the first title and escrow company to run on blockchain. According to the website, their entire process uses web3 blockchain technology, whether buyers make their purchases traditionally or with cryptocurrency.
The company promises faster closing times with fewer errors thanks to automated processes and blockchain smart contracts. In 2021, The World Economic Forum included Propy in their list of Technology Pioneers.
As privacy regulations are tightening across the digital ecosystem, blockchain technology can also relieve some serious compliance headaches. With regulatory guidelines such as GDPR and CCPA requiring companies to process and store consumer data more securely, the cost of human error is high.
By using tools like blockchain smart contracts, you can safeguard sensitive information more effectively while being transparent with customers. You can also “automatically check transactions, monitor regulatory compliance, and provide alerts or notifications in the event of noncompliance,” according to Finance Magnates.