Decentralized Finance (DeFi)
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.
Decentralized Finance was a term given by a group of entrepreneurs and Ethereum developers to bring the concept of “Open Financing” to the masses. DeFi was made to remove any intermediaries for transactions. In this case banks and the government. This would allow transparency, security, and speed with which the transactions occur.
The major downside of Centralized Finance is that the government has the right to control the money. They can print as much as they want, charge taxes, and even make laws that may or may not affect your money management structure. International transactions are heavily taxed, loans are given at higher interest rates and you are even checked if you move a large sum of money from one bank account to another. Well, this is an old-fashioned way of financing, which might just be replaced by DeFi. This is because when everything would be done in a P2P network with the help of cryptocurrency and blockchain then the authority that would control your payment structure would be a smart contract. More on that later.
Decentralized Financing requires stable coins. Stable coins such as USDT, USDC and more are coins whose value is tied to the US dollar. This means they are the crypto equivalent of USD. The reason why they are so popular is that you can move millions of dollars from one wallet address to another by just paying a very small amount of transaction fees and also without losing value.
Decentralized finance also helps you take loans at cheaper interest rates thereby staying anonymous with the help of smart contracts. Smart contracts are lines of codes that act as a government to blockchains. They are meant to perform a function with 100% transparency and even voting mechanisms. These smart contracts allow to borrow and lend cryptocurrencies in form of loans and are written in a way that if the person runs away the lender still can get their money back. This is also useful as the lender can be from any part of the world and also can make their lending rules to work with.
DeFi also gives birth to Decentralized Exchanges. These benefit from being independent and not being controlled by any regulatory authority. You can move billions of dollars from one wallet to another with the help of smart contracts. Decentralized exchanges like PancakeSwap and UniSwap have hundreds or even thousands of cryptocurrencies to trade, thereby giving freedom to the investor to decide when to deposit and withdraw their funds. Centralized exchanges have limitations on transactions because they have an overlying authority or government. So they have to think about adding new tokens to their exchanges as they have to go by the law.
DeFi is still at its early stages and the project needs to tackle a wide number of problems to overcome traditional financing in every possible way. But still, this project seems to have the potential to revolutionize how the financing works in which pieces of code would be the laws. Platforms like AAVE have already made groundbreaking records for lending cryptocurrencies at cheaper prices compared to what banks charge is astonishing. Margin Trading and Insurance are also possible through DeFi protocols. As these platforms are built on self-executing smart contracts more options would be created sometime in the future and they might just open more opportunities for the public.