What is DeFi?
Decentralized financing or DeFi (DEE-f-EYE) as it is commonly called in the world today is also known as ‘open finance’. This is a new technology in the field of financial services which is backed up by blockchain technology. It is a global and an open alternative to every financial service that we use today, like — savings, loans, trading, insurance, etc. Like any other blockchain technology, DeFi is also based on Decentralized Applications (dApps) or protocols. dApps means conducting the financial services using smart contracts, which are automatically enforceable agreements that don’t need intermediaries but use the online blockchain technology instead.
Who can use DeFi?
This service is accessible to anyone in the world with a Smartphone or any electronic device (like a tablet, pc, laptop, etc) and internet connection. This financial system functions independently and does not require a central regulation authority like –banks, central authorities, institutions, and intermediaries, etc. it allows multiple users at a time to hold a copy of a history of transactions which certainly means that it is not controlled by any- one/single centralized authority.
How does DeFi work ?
DeFi or “Lego money” as it is sometimes called because a user can stack dApps together to maximize their returns. A simple example could be taken as – that you buy any stable coin and then lend it on Compound to earn interest. You can do all this just with your smartphone as well.
One more example is- if you take a loan. While repayment, the collateral would be put up in the tokenized form on a blockchain ledger and, in case you are unable to repay/ or someone defaulted on their repayments, the deeds would automatically shift to the lender. In this process, no lawyers or banks or intermediaries would be required, and the whole process of buying and selling would become much cheaper comparatively.
Why should I Switch?
- Automated. The smart contracts are highly programmable as these are not managed by people but by the written codes. Once a smart contract is positioned into the blockchain, it does not require any human intervention, even if it does, it is negligible. This also means that these smart contracts are immutable-i.e., tamper-proof as well
- DeFi is transparent. Every transaction on the public block-chain is broadcasted to all the users on the network. Thus it also proves them the authority to verify that transaction. This type of verification provides a high level of transparency. The transparency does not necessarily mean optimal analysis of data but also that each and every ounce of the information is available to every user. The best part is that the DeFi protocols that are build on Ethereum are built with open source so that any user could view or audit them.
- Information sharing. There is a reason why DeFi protocols are called ‘Lego Money’, let’s look at that. The DeFi protocols and applications are built to integrate and complement one another. This means, if the developers use DeFi, they have an advantage and flexibility to build up their own protocol on top on already in use/existing protocols. These protocols also provide interfaces that can be customized and also where third party applications can also be integrated.
- Global. The dapps were designed to be global. Doesn’t matter which part of which continent you are sitting, you will always have an access to the same level of services and most probably the similar kind of experience on any block-chain platform.
- No Permission required. Another great advantage to actually start using these decentralized apps is that, these are completely permission-less. All you need is a crypto wallet, an internet connection and you are all set to create and/or use the DeFi apps. You don’t even need to fill lengthy forms!!
Conclusion of Defi
It is not a surprising thing to hear that DeFi is now considered as one of the fastest growing sectors in the world of crypto. It is becoming choice of the new generation because of its time saving features as well as many other features/services that we discussed (or could not discuss) in our article. Most of the Ethereum platforms are used for DeFi protocols. Since many people are now shifting toward the crypto currencies and smart contracts, DeFi might be referred as ‘future of financing‘.