Everything you need to know about decentralized finance (DeFi)

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Everything you need to know about decentralized finance (DeFi)

It has only been three years since the first mention of the DeFi term in Telegram chat back then. The DeFi movement started when an avid group of software developers and entrepreneurs decided

They wanted to give the freedom of financial services that are automatic, built on the blockchain, and disrupt the current conventional financial systems. Although there were many skeptical people back then, the enthusiastic group continued their movement.

Now, the defi development is a huge game changer. Well, why not? If you are able to control your digital assets without third-party intervention, you will want to keep them that way, won’t you?

With such a solution, many people will have equal opportunities to begin investing with less capital.Crypto users will be able to trade digital assets, obtain loans, exchange, and do other things without incurring high fees.But more importantly, there is no human intermediary that meddles with their business.

There is $90 billion of collateral that is locked in the DeFi services.

According to the statistics, over 11 million people have downloaded MetaMask. But others also use other digital wallet services like Trust Wallet.

Bitcoin wished for peer-to-peer money.But years later, Ethereum was born. It was actually the ground for the DeFi.

It is easy to comprehend the principle of DeFi.

Defi is the short form of decentralized finance. As the name suggests, we could focus on the word “decentralized.” We could take the number one cryptocurrency as an example. A ledger is a record that is decentaralized.

All of the transaction data is stored in the databases that are held by many different computers scattered around the world. These computers will keep tabs on each other. So, when one piece of data is broken on one computer, the other computers will quickly back it up. There is no way a hacker can kill this system.

The part that the centralized authorities cannot overcome is decentralization.There is no single party in charge of the transactions. So, it is impossible that our digital assets are handled by crazy intermediaries who want to steal them. Also, the government in your country won’t be able to tamper with the transactions either.

If the government shuts down all of the computers that held the bitcoin, the digital asset will not be gone since there are other computers in other countries that back up the full records of the transactions. That’s why these particular solutions have been annoyingly disrupting the centralized system lately.

  1. What are the primary advantages of DeFi now?

Decentralization is the key to the success of DeFi. It is a utopia where all users have an equal opportunity to invest in digital assets with small capital. The traditional financial model places a high reliance on centralized authorities to carry out transactions.Since they interact as intermediaries, there are many risks, such as errors, stolen assets, human errors, and so on. Decentralized services will eliminate all of the drawbacks of the centralized system with the DeFi.

Here are the core benefits of the DeFi

Accessible services

Unlike the centralized financial service, which limits the users’ applications, the DeFi platform allows everyone to participate. As long as you have an internet connection and a compatible device to operate the platforms, you can start using the DeFi services without any hassle. Back then, it was difficult to send money to other countries due to different regulations and limitations. Now, the problem is over with the help of the DeFi platforms.

Decentralization

The Ethereum blockchain’s main characteristics are decentralized and community-based. That means there is no central authority who can tamper with the transactions. You will have total control over your digital assets.

Autonomous experience

Because the network is decentralized, governments do not have control over shutting down the operation. Every node has an accurate copy of the blockchain to validate the transactions. So, although the government banned the platform in their country, there is no way to shut down the entire operation.

Transparent information

The “open finance” model is the nature of decentralized finance. Every transaction is visible to the public. The other users will also verify the transactions. There is no way for any user to tamper with the transaction for their own gain.

2. Then why hasn’t it already skyrocketed?

There are some reasons why DEFI has yet to skyrocket across the globe. It is still relevantly new for many parties in different industries. It will take time to convince the conservative parties to embrace the decentralized finance offer. Those who have relied on traditional banks to manage their assets will be reluctant to incorporate DeFi into their portfolio.

It is also crucial to ask questions when something bad happens on the DeFi platform. Banks and other established financial institutions can provide protection because they have mature services. Meanwhile, DeFi platforms still have a room for improvement.

Moreover, not all DeFi platforms can really give the best value for your money. Some of them even offer poor services.

The other concern is your asset use and risk. We know that cryptocurrencies have such high fluctuations. It could pose a real problem for all holders of digital assets.

The technical risks are also a concern. Removing the human intermediary from the system means that we rely on a piece of code to govern the transactions. It would be a huge problem if the code had some bugs and errors.

The regulations are also coming.

Those are the reasons why DeFi hasn’t yet skyrocketed.

3. DeFi’s Various Use Cases

As mentioned, there’s a huge change brought on by DeFi in the finance world and other industries. This breakthrough finance system can overcome the problems that the current systems are not able to do.

One of the most sensible use cases of DeFi is asset management. With the help of a decentralized finance solution, the users are able to control their own assets without any intervention from other parties. Asset management is a highly important aspect that makes DeFi win over centralized systems.

The other use case is the DAO, or Decentralized Autonomous Organizations. They are the opposite of centralized financial organizations. The other use cases are derivative assets, digital identity, insurance, P2P borrowing and lending, payment solutions, decentralized exchange, stablecoins, and so on.

4. Let’s take a look into the future.

With a plethora of successful DeFi projects and use cases, it is not an exaggeration to say that DeFi has the potential to transform the global financial system.Defi has the ability to solve financial problems that traditional systems cannot.So, what do you think? Would you embrace it sooner rather than later?