What is Decentralized Finance?
- Crypto In A Nutshell
- Nov 1, 2020
- 3 min read
"Decentralized finance is the concept of decentralization through cryptocurrencies, which is applied to financial mechanisms."
DeFi stands for Decentralized Finance, which describes a new decentralized financial system built on public blockchains like Bitcoin and Ethereum. DeFi utilizes the power of Blockchain as decentralization and transparency to create open finance. In it, everyone can access and use it anywhere, anytime without being governed by any centralized individual or organization.
Given its flexibility and amount of development, the Ethereum platform is the main choice for DeFi application, but that doesn't mean it is the only blockchain platform. You probably know Bitcoin and Ethereum are cryptocurrencies, but in reality, they are large, open-source networks that allow anyone to create applications that allow financial operations to take place without the participation of centralized organizations.
How important is decentralized finance?
Proponents argue that DeFi has the potential to change the lives of people without banks in the world, and make people's lives more plausible.
Looking towards the remittances market, foreign workers send billions of dollars across borders to their relatives back home each year. The fees they pay for doing this are often disproportionate, as it eats into their modest income. DeFi services are capable of cutting these costs by more than 50%. Not only does this motivate employees to make more money and be more productive, but it also helps support economies on the other side of the world.
Loans are another difficult point that can be solved with DeFi. Currently, people without a bank account are nearly unable to get a loan, often because they lack a credit history and record with a banking institution. The DeFi platform connects borrowers and lenders directly, eliminates credit checks and allows digital assets to be collateralized.
Other forms of decentralized finance include stablecoins, a digital currency that protects consumers against the volatility of cryptocurrencies by being tied to another asset like a dollar or gold.
Why is DeFi becoming more popular today?
The technology is more affordable, which means a higher proportion of the population can use the tools needed to get access to DeFi.
As of January 2019, 57% of the world's population currently uses the Internet regularly. Plus, smartphones are starting to become significantly cheaper, meaning they are more affordable for the poorest people on the planet. Indeed, a recent World Bank study found that two-thirds of bankless citizens now own mobile devices - the self-naming technology they need to start exploring the DeFi platform.
Public blockchains are also starting to become more complex, and innovative DApps are always being announced. Many of them have been built on the Ethereum blockchain.
However, a major limitation in reaching consensus is that the multitude of DeFi organizations are operating independently of each other, creating a fragmented market. And, to complicate matters, there are countless governments that have contradictory attitudes towards cryptocurrencies and blockchain in general. Several countries have banned digital currencies outright, with countries like India threatening to put those caught in crypto transactions 10 years in prison.
What does DeFi give us?
DeFi gives you control over your own assets. While many banks promise to provide more control to users, in reality, you are still relying on them to manage your money. DeFi's goal is to give you full control over your assets, and it can be due to decentralization and blockchain technology. In addition, many financial application developers are adopting open-source protocols for trading through decentralized exchanges.
Practically all protocols are open source, allowing anyone to build new financial products on top of them. Developers around the globe can collaborate on creating new products that lead to faster innovation and secure networks.
Anyone can safely store, transact, and invest their assets in blockchain and earn much higher returns than the traditional financial system. Since there is no middleman handling your assets, you have complete control over your investments.
Conclusion
The DeFi market is very small compared to traditional finance, but it has accelerated rapidly since last year. With more financial dApps and projects, we can expect to achieve a truly decentralized financial reality where the traditional financial market is interacting with digital assets and synchronous perfect blockchain.
REFERENCES
Binance Academy. (2019, September 30). Decentralized Finance (DeFi). Retrieved November 15, 2020, from https://academy.binance.com/en/glossary/defi
Cardona, F. (2019, September 11). Decentralized Finance: An Emerging Alternative to the Global Financial System. Retrieved November 15, 2020, from https://www.visualcapitalist.com/decentralized-finance/
Blenkinsop, C. (2020, January 10). Decentralized Finance, Explained. Retrieved November 15, 2020, from https://cointelegraph.com/explained/decentralized-finance-explained
What is decentralized Finance (DeFi) ? (n.d.). Retrieved November 15, 2020, from https://www.coinhouse.com/coinhouse-academy/blockchain/what-is-decentralized-finance-defi/
Publish, H. (2020, October 29). DeFi là gì? Bức tranh tổng quan và tương lai của tài chính phi tập trung. Retrieved November 15, 2020, from https://coin98.net/defi-la-gi
Rosic, A., & Blockgeeks. (2020, September 17). DeFi – What in the world is Decentralized Finance? The Most Comprehensive Guide. Retrieved November 15, 2020, from https://blockgeeks.com/guides/demystifying-defi-ultimate-guide/
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