Author: Mohamed Hamza Ghaouri
Historically, central authorities have issued currencies that underpin our economies, which ultimately gave them more power as more and more people began to trust them. However, trust has been shattered from time to time, leading people to question the ability of centralized authorities to manage this money. On the basis of the idea of creating a financial system open to all and minimizing the need to trust and rely on a central authority the concept of DeFi has emerged. Alternatively to comply with shariah precepts there has been a growing debate regarding an Islamic DeFi (DeIFi).
It is argued that DeFi started in 2009 with the launch of Bitcoin, which was the first peer-to-peer digital currency built on top of the blockchain network. Thanks to Bitcoin, the idea of bringing transformation into the traditional financial world using blockchains has become an essential next step in the decentralization of existing financial systems. The launch of Ethereum and more specifically smart contracts in 2015 made all of this possible. Ethereum has encouraged businesses and enterprises to build and deploy projects that have shaped the DeFi ecosystem.
Decentralized finance or DeFi is an open, global financial system designed for the Internet age. It is an alternative to an opaque, tightly controlled system that is maintained by decades-old infrastructures and processes. As an alternative to the existing banking options and local currencies, DeFi gives control and visibility over one’s money as well as exposure to global markets.
Thanks to the Internet connection, DeFi products are open to everyone and the markets are always open with no centralized authority that can block payments or deny access to anything. Services that were previously slow and prone to human error are automatic and more secure now that they are managed by codes that anyone can inspect and scrutinize.
To see the potential of DeFi, we need to understand the issues that exist today:
- Some people can’t to open a bank account or use financial services.
- A hidden burden of financial services is the user’s personal data.
- Governments and centralized institutions can close markets at will.
- Trading hours are often limited to hours of operation in a specific time zone.
- Money transfers can take days due to internal human processes.
- There is a premium on financial services as a share of intermediary institutions.
The main difference between DeFi and Traditional finance is that DeFi Apps operate without a central service exercising control over the entire system allowing an improvement in the financial sector. The following table shows the differences between DeFi and Traditional finance:
DeFi applications aim to recreate traditional financial systems, such as banks and exchanges, with cryptocurrency. There’s a decentralized alternative to most financial services. Through DeFi Loan, users can lend cryptocurrency just like a traditional bank does with fiat money. Borrowing and lending (AKA Open Finance) are among the most common use cases for DeFi applications, but there are also many increasingly complex options:
- Sending money around the globe.
- Access stable currencies.
- Borrowing funds with and without collateral.
- Savings, investing and funding.
Inspired by blockchain technology, DeFi is referred to as financial applications built on blockchain technologies, typically using smart contracts. Smart contracts are automated enforceable agreements that do not require intermediaries to execute and can be accessed by anyone with an internet connection.
DeFi consists of applications and peer-to-peer protocols developed on decentralized blockchain networks that require no access rights for easy lending, borrowing, or trading of financial tools. Most DeFi applications today are built using the Ethereum network, but many alternative public networks are emerging that deliver superior speed, scalability, security, and lower costs.
However, a DeIFi is a decentralized finance system in which shariah compliant financial products, financing instruments and currencies become available on a public decentralized blockchain network, making them open to anyone to use, rather than going through middlemen like banks or brokerages. A DeIFi has a great potential to achieve more effectively financial inclusion by reaching out to the underprivileged and most vulnerable and providing them with a variety of financing tools.
Accordingly, Finterra has designed the Galactic Blockchain. This platform can be customized to serve as a DeIFi (Decentralised Islamic Finance) platform through the issuance of tokens that might be bought, sold and transferred easily between investors, lenders and fund seekers. The tokens can also be donated or given as Waqf from around the world. Anyone with a mobile/laptop and Internet access can access Finterra’s the Galactic Blockchain platform.
To sum up, the DeIFi space is gradually catching up with the traditional financial system and despite certain constraints, the world of decentralized finance is on the road to prosperity. It is difficult to predict how this space will take shape as the power to create financial services democratizes. However, DeIFI is reshaping the current financial system and it is believed that the exit will fulfill the dream of providing fast, secure, egalitarian and shariah compliant financial services.