Decentralized Finance
Creating a System of Transparent Transactions
Decentralized finance, also known as DeFi, is an emerging trend in the financial ecosystem. DeFi is built on blockchain technology and uses cryptocurrency to manage financial transactions. With the rise of these innovative technological solutions, the fintech industry is now more inclined than ever to maintain transaction transparency. This is where DeFi comes into the picture as a missing piece to the puzzle to replace the central authority of traditional financial institutions like banks. Decentralized finance is an approach to replace centralized institutions with peer-to-peer financial services. This innovative system uses open-source blockchain networks, such as Ethereum, to create a model of decentralized trading. The result is simple - the consumers gain direct access to their investments and financial services without relying upon any third party.
A close look at Islamic Finance and DeFi
Islamic Finance is similar to the concept of decentralized finance because it is also built on the principles of decentralization, transparency, and peer-to-peer networking. The centuries-old financial system of Islam believes in setting forth the foundation of a model backed by mutual aid, cooperation, and cohesion. Islamic finance tries to empower the individuals to control and monitor their finances without the intervention of any person or institute. Both DeFi and Islamic finance believe in greater transparency, allowing people to keep a track of their financial resources. With these systems, the masses have complete control over their assets, and asset trading becomes a simple affair.
There are also specific areas of conflict between Islamic finance and DeFi - for example, where interest is involved. Islam, as a matter of fact, prohibits interest; however, there is a stark presence of interest-based lending across decentralized finance. It is evident that DeFi allows people to add their fiat currency or crypto tokens to a lending pool, enabling borrowers to take loans from the pool and pay interest against the amount borrowed. Therefore, this appears as a prime conflict between the two financial aspects of the discussion.
Islamic finance institutes are leveling up their efforts to reap the benefits of technology-based approaches toward financial management. In the same way, a growing interest is also observed among the stakeholders of Islamic finance in using DeFi platforms and benefitting from a decentralized and transparent transaction system. By adopting only specific perspectives from decentralized finance, such as where interest does not have any footprint, the Islamic finance institutes are looking forward to offering Halal financial alternatives to their stakeholders.
Integration of Islamic Finance and DeFi
At present, the finance ecosystem shows that the integration of Islamic finance and DeFi has just begun, with Decentralized Autonomous Organizations powering their business models via blockchain technology. These organizations aim to offer a system built on the principles of inclusivity and mutual aid to investors. This integration of Islamic finance and DeFi has a focused approach towards upholding the prime tenet of Shariah-based finance i.e. creating a transparent and decentralized win-win situation for both the client and the institute. It is pertinent to note that decentralized finance has many potential applications to improve how Islamic finance institutes offer financial services. By employing blockchain and its related capabilities, including NFTs and smart contracts, investors can be given access to digital ownership of their assets. Despite the inherent risks associated with coding errors and tech disruptions, integrating these systems may have the potential solution to the existing financial concerns of investors.
Bottom Line
Although many critics believe that integrating DeFi and Islamic finance is difficult, the increased awareness of technology-driven community platforms is opening doors for DAO to negate those beliefs. This is also where TAKADAO, as a Shariah-compliant Halal insurance alternative, steps in. Established on the shared Islamic principles of mutual aid cooperation, we aim to help communities by offering a transparent model of Takaful insurance powered by DeFi. As a DAO, we are working towards building a system that provides transparency to our clients and upholds the concept of decentralized finance in its most authentic essence.
