We are now living in two worlds, the natural world and the world of the internet. Since the coming of the internet, everything has changed, including the financial system. Blockchain technology is new and still developing until now which has started to get into the traditional financial system. Bitcoin is a popular cryptocurrency now, which has become the perfect example of blockchain innovation in finance. However, we’re here not to talk about Bitcoin. We’re here to talk about the decentralized financial system based on blockchain technology called DeFi, Decentralized Finance.
Decentralized finance, often known as DeFi, is sometimes described as an ecosystem of financial tools and apps that are “roaming” over the internet. To put it briefly, DeFi links financial consumers directly without needing middlemen. It seeks to develop and duplicate existing decentralized blockchain-based services or business models.
DeFi is more precisely a movement. Its goal is to create transparent, open-source, permissionless, decentralized markets. DeFi promises to upend asset control and financial services by making the ecosystem accessible to everyone, regardless of location, using P2P dApps (decentralized apps).
Let’s examine some illustrations to better comprehend this:
- DEXs: A decentralized exchange, often known as a DEX, is a peer-to-peer market where cryptocurrency traders conduct transactions directly.
- Platforms for DeFi crypto lending and borrowing: Apps created on Ethereum offer loans without middlemen.
- Apps and wallets for managing assets are included in DeFi asset management. These serve as entry points to Web 3.0.
- DeFi insurance: Customers may purchase protection for their digital assets, such as smart contracts. These procedures guard traders and investors against exchange hacking and failed smart contracts.
- DeFi yield protocols: A platform that provides farming and staking options for yield.
Regardless of social standing, region, or financial situation, everyone should have the right to receive financial services. DeFi sets the way for developing an open system, an economic model based on blockchain composed of new services, markets, and goods.
Every activity, transaction, or information exchange between participants will be validated by blockchains rather than a third-party organization like a formal institution (bank, etc.). This practice is sometimes referred to as “open finance.”
Blockchain and DeFi Technology
DeFi protocols are created mainly on Ethereum, the second-most well-known blockchain. The goal is to eliminate intermediaries and third parties frequently involved in financial transactions. Smart contracts are used to do this.
Smart contracts are just computer programs capable of carrying out all the tasks of an intermediary. The Ethereum network allows for total financial independence since, like most public blockchains, it is owned by no one.
Public blockchains like Ethereum use a customized Turing-complete coding language. In essence, it enables users to create immutable smart contracts. These automatic lines of code handle and carry out all transactions in the network and are also impossible to change.
DApps, smart contracts that automate transactions, greatly influence DeFi systems. This eliminates human biases, making transactions more effective, quick, and easy for both parties.
Read also : Why You Need A Market Maker For Your ICO
What Distinguishes Crypto from DeFi?
Similar to traditional money, bitcoin functions as a store of value and has its own blockchain. In contrast, DeFi enables you to borrow, lend, and exchange cryptocurrencies like Bitcoin in a manner similar to traditional financial institutions like banks.
Defi’s Advantages For The Financial System
The emergence of cryptocurrencies like Bitcoin has changed how value is kept and how payments are processed online. The banking sector had a reputation for being a sluggish, insecure bureaucracy before blockchain. The debut of DeFi, however, still in its early stages, makes a compelling case for the future of finance.
DeFi wants to increase the accessibility and openness of the financial markets by getting rid of middlemen. Decentralized apps provide both users and investors practical, long-term advantages. Naturally, the following fundamental characteristics of blockchain technology are at the heart of the DeFi movement to make it all possible.
Decentralization has always been the hallmark of the blockchain’s unique value proposition. Blockchain networks are democratizing banking and finance by sharing transaction history and anonymously preserving every transaction completed, in addition to creating some of the largest financial ledgers in the world. The intention is to stop depending on traditional financial institutions to store, transact, and exchange value.
Anyone may create or utilize dApps and enable various integrations in the context of Ethereum, a permissionless form of blockchain, without requesting permission from a middleman. Blockchains employ consensus procedures to verify transactions and data; anybody may participate in these processes.
Decentralization opens the door to more openness when it comes to transactions. The blockchain’s underlying cryptographic principles ensure that data is only recorded when confirmed, adding to its openness. The data cannot be changed because DLTs (distributed ledger technologies), such as the Ethereum Network, store all previous activity immutable information. Additionally, it is still available for public review on the internet.
The immutability of blockchain technology is guaranteed by both consensus techniques (such as proof-of-work and proof-of-stake) and encryption, making it impossible for any efforts to manipulate the data that have been saved.
What Dangers Do Defi Poses?
Recognizing the technological hazards involved is crucial since loan products have the potential to generate income that is superior to that of traditional financial products. DeFi dApps and protocols’ extensibility and high-interest rates have driven the industry to previously unheard-of heights of expansion. Still, the ecosystem is also very risky and volatile. System flaws and faults are prone to occur in hardware, software, and protocols. Poor testing and insufficient smart contract audits may affect the functioning and hurt user experience. Performing thorough due diligence is crucial to minimizing any related risks. Even the most dependable stablecoins come with a high degree of investment risk.
Decentralized finance is based on an open financial system with services anybody can use from anywhere. Even though the DeFi ecosystem is still developing, it will probably significantly influence the current financial system or maybe in the future.
Well, that’s all we can share about DeFi. Are you ready to use DeFi as your financial system now?