DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. The current financial system faces many barriers and limits, including corruption and mass centralization of power.
DeFi draws inspiration from blockchain, the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source. That’s important because centralized systems and human gatekeepers can limit the speed and sophistication of transactions while offering users less direct control over their money. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases.
Unlike the traditional system, which is plagued with distrust, the blockchain and DeFi offer seamless and transparent executions of transactions through smart contracts without needing permission of a third-party. This means, there is no more standing in queues to receive or pay in cash, no more carrying of paper money around, and the risk associated with it, or unnecessary bank charges.
The Revolution of DeFi
During the financial crisis, people began looking for alternative solutions to the traditional banking system. Many felt the system took a big gamble and somehow managed to get away with it, and in the end, caused harm and struggle across the world. The new solution people looked for was a system that would cut the huge centralization of power in the traditional financial system, and enable transactions and financial services to be carried out in a peer-to-peer way. In 2008, Bitcoin and DeFi were born.
Advantages of DeFi
- Autonomy
In finance, the concept of autonomy is a key component that is often overlooked. For the past 100 years, there hasn’t been much innovation in the way we use money.
In most ecosystems, including centralized institutions like banks, decisions are made by a central authority and passed down hierarchically, often. This central authority can put a hold on your account, confiscate your assets, and block your transactions. In the case of DeFi, a smart contract can do the same, except for the fact that you get transparency so you can decide whether or not you can place your trust in a protocol.
Today, there is a shift. We have digital assets, and we have DeFi. With DeFi, you have the power to own your own money and assets.
- Accessibility
DeFi is very easily accessed. DeFi removes the barriers placed by various financial institutions to restrict the participation of users like high loan rates. Moreover, 1.7 billion people are unbanked, cut off from the financial services these institutions provide. Interacting with DeFi only requires users to have a mobile phone with an internet connection, a mobile wallet, and some cryptocurrency, whereas banks need numerous documents to validate a person, and can make getting a loan a defeating experience. With DeFi, users can easily lend and borrow cryptocurrency without a need for collateral.
- Tradability
In the legacy financial system, banks tend to keep only enough cash in the vault to meet their anticipated transaction needs in order to lend or not based on the whims of the bank. In the DeFi system, we have crypto-backed lending and decentralized exchanges that enable us to borrow, lend, invest, and trade in our financial interests.
- Transparency
Decentralized Financial Applications (DApps) interact with a decentralized finance protocol. These protocols allow you to take control of your money by sending and receiving payments anywhere in the world, for free.
These applications are built on open protocols that are publicly accessible. This means that your data is available to the service providers and the general public. Some of the best DeFi applications already use their public data to help keep everything fair and honest.
- Efficiency
Let’s think about wire transfers. Wire transfers, done through banks, take around 2–3 days to process, come with either known or unknown fees, and feel completely outdated compared to the current technology movement. Looking at the big picture, we can all probably agree, our banks are inefficient when it comes to carrying out transactions due to the issue of costly fees, slow speeds, inability to conduct microtransactions, and lack of security.
DeFi vs. Traditional Banking
DeFi is a new space that is quite different from traditional banking. The rise of decentralized Finance (DeFi) has finally given the world an alternative to conventional banking.
Traditional banking is a centralized system. DeFi is a decentralized and open-source system and is more like a platform with a developer and community.
As decentralized finance grows and becomes more popular, traditional banking will continue to decline. More and more people are opting for cryptocurrencies, digital assets, and blockchain-based finance rather than conventional banking. The best part of this decentralized finance revolution is that people have better control over their money — more flexibility, options, and protection from fiat inflation. They don’t have to worry about their bank not letting them withdraw their money or having to wait days or even weeks for a wire transfer to go through.
The Future of Defi
Traditional banking has been an institution that has been around for hundreds of years and has been the only way for people to store and transfer their money. With so many innovations and technological changes, it’s no surprise that people are increasingly turning to DeFi as a way to store and transfer their money.
The future of DeFi looks bright for sure. Many innovations can be done based on DeFi- and a lot is happening right now in this domain. Many exciting projects are being added to the ecosystem.
Defi is evolving to reflect the traditional financial services environment daily. Defi is here to make the biggest revolution in finance history. This is possible because Defi could be perceived as a faster and less expensive alternative.
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