What is Decentralized Finance?
Some proponents of the trending blockchain technology and cryptocurrencies have shown a lot of promise in terms of finance. To some people, it is the form of salvation from the already existing centralized financial system, government, internet, corporate world and anything that holds power or authority over normal people.
But in reality, the so-called cryptocurrencies have not been able to stabilize themselves. Although top digital currencies like Bitcoin, Ethereum, Dogecoin are going through rapid progress, at the same time, prices of these digital coins are decreasing at the same pace it is going up.
So what has been achieved by these cryptocurrencies so far? To find out the answer to this question, we have to look into Decentralized Finance or commonly known as DeFi. in the existing centralized systems, to conduct a transaction, transfer, trade, etc. one has to rely on intermediary services like banks and other financial organizations which are in sole control of your finance and possesses the authority to approve or terminate those particular transactions.
Decentralized finance or DeFi, on the other hand, uses blockchain technology where an individual is in total control of their own money. The trade or transactions can be conducted from anywhere, anytime. DeFi rejects the conventional third parties or intermediaries such as banks so that individuals can perform transactions by themselves without being under anyone else’s influence or authority. Also, the user won’t have to pay any third-party transaction fees for executing transactions.
Although the system is fascinating on its own, it also has some potential risks, which developers need to address before it can be implemented and adapted in the mainstream.
So What exactly is DeFi?
What happens when you want to take a loan or borrow money from the bank? Usually, you need to have money or some kind of asset which will be held as collateral. The bank will go through your finance papers, and if approved, they will set an interest rate in addition to the loan repayment. In this scenario, the bank has the overall authority and control over your assets and money. And in case you can’t repay the loan, the assets you have used as collateral will be seized.
Apart from loans, in terms of asset management, stock trading, insurance and other financial services, banks are in the middle of everything. Even when you use financial applications such as Robinhood, Affirm, etc. the intermediary role of a bank is not disrupted.
DeFi completely overturns this process. It literally skips the bank to perform its activities. The decentralized software doesn’t take custody of the user’s funds. Instead, they use ‘smart contracts’. Smart contracts are programmed nodes that automatically perform or fulfil an action when certain or all conditions are met.
Suppose you want a loan, all you need to do is put your crypto coins as collateral, and you will instantly receive the funds you need. All of this is conducted by smart contracts which are there in the blockchain network. You won’t need the bank’s approval for your request.
DeFi, if fully adopted, can be a potential game-changer in financial work. No one has any idea of what is going to happen, what changes will DeFi bring in the future, but we can’t deny the fact that it is a breakthrough.
