What is DeFi?
Decentralized Finance or DeFi for short refers to a movement to create an ecosystem of open source, unauthorized, and transparent financial services made universally accessible and functioning without a central authority. Most DeFi apps are built on top of the Ethereum blockchain, but as new blockchain protocols gain popularity, the DeFi ecosystem is likely to grow.
These include the ability to save, take out loans, trade, take out insurance, and much more. All that is needed is a smartphone or computer with an internet connection. This makes it possible to use smart contracts. In the context of DeFi, dApps already exist that can enable the creation of stablecoins, the completion of a credit transaction executing automated advanced investment strategies.
Problem with the traditional system
The key question is why use DeFi? After all, a traditional finance system exists for all of these products.
Traditional finance operates in a centralized manner with complex procedures, intermediaries, and checks and balances in place. Traditional finance has high fees associated with it due to its complexity and the number of parties involved, even for reasonably simple transactions. To earn profits and higher returns, traditional finance also leaves out a good portion of the world’s population, as the cost of serving these users is higher than what could potentially be earned from them in the form of transaction fees.
This clearly means that these authorities have complete access and control over all the assets and funds, thus increasing the risk of any manipulation. Also, out of the huge profits that banks earn via lending loans at higher interest rates or stock market investments, the actual depositors earn very little interest over the investment (profit). These authorities have the final say on customers’ investments, have complete access to their accounts, and also there is no transparency throughout the process.
To take care of these issues, there emerged a need, to have an open and decentralized set-up and this is the place where Decentralized Finance arose deeply.
How can DeFi solve this
DeFi has several advantages and solves the problems uniquely:
1) DeFi are decentralized, they eliminate any intermediaries thus maintaining utmost security and integrity.Smart contracts are self executed without the requirement of any human interference as business rules within smart contracts deployed over the Blockchain platform.
2) Decentralized Finance provides complete transparency of transaction activities to all the users publicly. A governing body cannot unilaterally oppose a transaction between two consenting parties.
3) All DeFi apps are globally accessible to anyone across the world with an internet connection to access the financial services offered. Typically, Decentralized Finance is built on permissionless, public blockchains that empower anyone to create these applications. The cryptocurrency required to execute the transactions on the Blockchain is straightforwardly intuitive with a client’s crypto wallet.
4) Multiple DeFi apps can interact with each other in a secure manner as they are built to complement one other thus exhibiting interoperability.
5) Blockchain is immutable and tamper-proof, DeFi apps provide complete security throughout the financial process.
6) The transactions being registered on a blockchain, cannot be modified or unilaterally cancellable.
Projects using DeFi
Lending platforms permit borrowers and lenders to transact with one another utilizing smart contracts rather than intermediaries. Lenders can earn interest on their crypto by offering them on loan to a borrower. In correlation, borrowers can get to liquidity without having to sell their assets.
These aren’t as volatile as other cryptocurrencies because they are backed by real-world assets or pegged to fiat currency such as USD or gold. Stablecoins make it simple to tokenize certifiable resources and afterward enable exchanging these resources on blockchain-based platforms.
Exchanges and open marketplaces
Decentralized Exchanges offer services similar to crypto and digital asset exchanges, except that they remove the need for storing the digital assets on the exchange. These exchanges are enabled via instant P2P transactions and operate without an intermediary. When trade of resources or exchange has been instated, a series of savvy smart guarantee the legitimate execution of the exchange and the secure exchange of assets. Different sorts of open marketplaces focus on trading non-fungible tokens (NFTs), regularly alluded to as crypto-collectibles.
Decentralized Betting platforms
Users make bets about the outcome of future events on prediction markets. Prediction markets on DeFi platforms operate without intermediaries. Betting platforms, or prediction markets, have for quite some time been famous financial tools for hedging risk and speculating worldwide events. Decentralized prediction markets enable exactly the same thing, however with cryptocurrencies and without the ability to censor the markets.
The final question is how great is the potential of the DeFi movement? It may be explicit that there are several things within the field of cryptocurrencies that are overhyped. However, with DeFi, it is a bit different, eg — MakerDAO a well-received market product
DeFi is currently a space of innovative experimentation instead of professional financial operations. Nevertheless, this can be said for the majority of the crypto ecosystem. We are still in a very early phase of the whole DeFi movement. The potential behind it is huge. Even if only one part of DeFi succeeds in the future, that is already more than enough.
To fill the gap between theory and practice DeFi has yet to overcome its core roadblocks. More education is needed so that the masses are aware of this alternative system. Only a tiny percentage deal with the issues surrounding the DeFi sector in particular or have even used it.