Decentralized Finance

What is DeFi?

DeFi is short for decentralized finance and refers to an all-inclusive ecosystem of applications, financial services, and other financial infrastructures that operate within the key principles of privacy, transparency, neutrality, and sovereignty. DeFi tools are openly accessible and operate utilizing blockchain technology, and it will be a game-changer for the financial world and the global economy as we know it.

Decentralized finance includes a wide spectrum including digital assets, smart contracts, dApps which are built on blockchain technology. Considering the amount of development and flexibility involved, the Ethereum platform is currently the foremost choice for DeFi applications; however, it is not the only one. 

Imagine an open financial system in which financial tools and services can be built in a decentralized manner. Since these applications are always built utilizing blockchain technology, the data can easily be verified.

With the use of decentralized technology like smart contracts, DeFi has led to the elimination of middlemen, which have long plagued finance unnecessarily. This has created favorable situations where:

• One can get access to instant loans without the need for paperwork sans any bank approval.
• One can earn real interest with their assets without the need to sacrifice them due to the prevailing low-interest rates. 
• Quick issuance of company stocks without the need for banks to intervene thereby saving one from exorbitant bank fees.

History of Bitcoin & DeFi

DeFi, or decentralized finance, originated from blockchain technology. 

Bitcoin, which most people have at least heard of by now, was the forefather of Defi. Bitcoin was created by an individual or a team of individuals under the pseudonym of Satoshi Nakamoto in 2009 as a peer to peer electronic cash system. Peer to peer in this instance meaning that individuals can transact with one another directly, user to user, without a trusted third party.

Bitcoin was created in response to the bank bailouts after the 2008 financial crisis and a time where major banks were accused of rampant fraudulent activities. It emerged like the phoenix out of the ashes and provided hope for a new way of life that many citizens of this world so longed for. This innovative and exciting notion laid the foundation of a decentralized, censorship-resistant, and open and transparent platform, with the intent of replacing or strengthening the traditional system of value exchange. 

The emergence of DeFi

Bitcoin is the first major and successful public blockchain and it is still the most popular and largest in terms of market capitalization. Yet over ten years after its invention, thousands of projects have been rolled out under the same guiding principles of decentralization. Bitcoin being open-source has allowed developers around the world to contribute to the community and create similar projects. The new currencies that emerged after, based on either blockchain or similar technologies, are known as cryptocurrencies that thrive on the ideologies of DeFi.

Consider the situation of a laborer who doesn’t own any bank account who has his daughter working in the US. Under the current remittance system, the fee alone overcharges the funds she sends by 7%. This apart, the laborer has no access to financial markets for making any investments. Inflation can eat away at his income over time, as he is unable to earn any interest over it. 

Decenttralized Finance (DeFi) enters the building.

Today, with the implementation of DeFi, the laborer can not only enjoy a larger portion of the funds due to lower fees, but an app on his smartphone allows him to invest a certain amount to generate a return on his savings.

The top financial leaders of the country have been holding on to their indomitable positions for long. But with glaring inequalities of these global financial systems in the wake of economic meltdowns, the dominance of the traditional financial system is waning.

With this pattern emerging in almost every region of the world, many crypto startups have risen like a phoenix with divergent sets of ideas, and with one principal intention: to ensure that financial services are accessible to everyone on a global scale. The adoption of Blockchain technology in finance is reshaping the existing ecosystem into a new world which is what we call Decentralized Finance or DeFi. With DeFi, not only finance is accessible to everyone, but it is also characterized by a relatively lower transaction price and security.

Let’s take a closer look a how DeFi measures up with traditional finance.

How DeFi scores over Traditional Finance

The best part about DeFi is the autonomy, which will in the coming years overthrow the central control exercised by governments and larger enterprises. DeFi certainly scores over Traditional finance, we tell you how:

• Irrespective of who creates, administers, and manages any DeFi service, there is complete transparency in its operations.
• Users have 100% control and access to their money. Custody is not in the hands of any financial institution like a bank. 
• There are no geographical boundaries restructuring you, neither is there a dependence on verifying, again and again, your identity to manage digital assets. For those 1.7 million unbanked people, DeFi facilitates access to money with absolute control of money by its users.
• At the center of its operations, DeFi is not controlled by any institutions. The major role played is by the algorithms which are written in code or through smart contracts. After deploying smart contract DeFi apps can run without any human intervention.
• Lastly, DeFi comes with the power of code transparency making it possible for anyone to audit. This develops trust and the transactions being pseudonymous, questions about privacy are unlikely to emerge.

Many have pointed out that DeFi is just another form of ‘Open Finance’ which has been a matter of debate ever since it came into being. 

The benefits of DeFi

In the quest to shape the global financial system, DeFi offers myriad benefits.

• DeFi is a disruptive concept that aims to tear apart the concept of status wealth. It enables wider global access to financial services. It intends to eliminate the barriers that prevent global access to financial instruments.
• The cross border payments are affordable because the role of intermediaries has been eviscerated.
• There is little doubt that DeFi provides superior security and unmeasured privacy. Centralized institutions are vulnerable to breaches. DeFi does not have any single centralized source of failure for any breaches to occur. 
• Decentralized Finance also offers censorship-resistant transactions. The DeFi system brings the required stability and is a pefect option for those countries which are reeling under the rule of corrupt governments and leaders.
• In terms of becoming more mainstream, developers of DeFi applications are incessantly focussing on creating a seamless, integrated, transparent, and intuitive user experiences so that the full advantages of DeFi can become apparent to the mass general pubic

While each of the benefits is powerful in their own right, a combination of these can bring profound implications. 

The Future of Decentralized Finance

DeFi is powered to change the world economy. It will enable the unbanked to join the rest of the world and become a part of the economic system thereby accelerating new investment opportunities. All the challenging areas in the financial system like loans and remittance is easily addressed by DeFi.

By removing inaccuracies, middlemen, and centralized control, DeFi is without a doubt the future of the entire financial sector and will transform the global economy.

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