Why Decentralized Payments Instead of Centralized Ones?
In a world, where we are used to paying for everyday transactions in a centralized manner, the question arises why we should even use decentralized solutions.
As long as one lives in a country with a stable democracy, there do not seem to be many reasons to have to rely on decentralized payments. But as it is known, in many parts of the world, people do not have the liberty to transact as they wish because they live in countries with heavy censorship and / or dictatorships.
This is the big turning point, where decentralized payments come in and help protect an individual’s sovereignty with the freedom to transact to anyone, at any given time.
The centralized banking system as we know it, offers advantages, but also far more disadvantages. For one, the settlement times are a relic from the past and cross-country transactions can be very costly. Decentralized payments on the other hand, using blockchain technology, offer far less friction and near to instant settlement times. Furthermore, blockchains are running 24/7 and one has the ability to transact to any address one wishes to.
Nevertheless, decentralized payments also still face some challenges:
a. (Self-)Custody: An individual is usually responsible for the storage of their private keys and the loss thereof would result in the loss of all funds tied to the private keys.
b. User Interface and User Experience: Getting in touch with decentralized payments includes a huge learning curve, as people who are not familiar with the concepts can get easily overwhelmed by technical jargon and complex user interfaces which require deeper knowledge.
c. Volatility: The majority of assets, which are used for decentralized payments (with the exception of currency-pegged stablecoins, but those bring other risks with them) are subject to high price volatility and have not proven to be long-term stores of value and this in turn is also bad for the user experience.
However, given enough time and resources, all these challenges can be overcome in the future as the whole industry matures. Also, people are getting tech-savvier year by year and are not shy to try new technologies.
With certainty it can be said that it is always best not to put all your eggs into only one basket and that it is better to diversify. Therefore, decentralized payments are a great alternative to centralized ones and are here to stay, even if they have some shortcomings nowadays.
TLDs Supporting Decentralization
TLDs are another step in the direction of decentralization. Instead of having to memorize complicated addresses, one can simply have their own Web3 identity by registering a domain with freename.io. With a one-time fee one can simply register their own domain there and keep using it, without an expiration date. In a future where more and more people start exploring the decentralized web, they will have the urge to create their own digital identity and using TLDs is the solution. With TLDs you can link your wallet to a unique name and keep it on display on Freename.
Graph 1: Numbers of Freename Top Level Domains Sold in 2023
Graph 2: Numbers of Freename Top Level Domains Sold per Top Five Countries in 2023
Introduction to DeFi
Decentralized Finance (DeFi) offers many new aspects above and beyond just decentralized payments. For instance, with Aave, one is able to borrow crypto assets by supplying them to a protocol and has therefore the ability to take on leverage, but with the risk of getting liquidated in case of a sharp price drop in the crypto assets that were supplied.
Furthermore, there are no centralized parties involved and additionally, all of these services are permissionless, meaning that anyone can participate in the system and take out a loan on the crypto assets that they supply.
People can also put their crypto assets to work and earn yield on them by participating in the Aave ecosystem. At the time of writing (11 July 2023), the Aave market size was over $7 billion USD and over $2.6 billion USD in crypto assets were borrowed at that time (Source: Aave v2 and v3 together).
Graph 3: Total Value Locked across Decentralized Finance Protocols (Source: DefiLlama.com)
Over the past five years, the Total Value Locked (TVL), which can be understood as crypto assets locked in smart contracts, has grown tremendously as can be seen on Graph 3. What started with under $1 million USD, has grown to over $40 billion USD, which translates to a growth of over 830% per year on average. But as crypto asset markets are well known for their volatility, these figures do not add up nicely year after year and promises for further growth cannot be made.
Nevertheless, given a long enough time horizon, one can definitely feel optimistic about the future and developments of Decentralized Finance.