19 October 2020
A Decentralized Finance also abbreviated as DeFi is known as the inclusion of all the finance applications being developed through blockchain. Decentralized finance consists of a decentralized network wherein all the computer has the same data through a peer-to-peer network. A decentralized network is permissionless and it is open to anyone and everyone. It is open-source software that is utilized to develop, create or build various financial products and services.
DeFi includes digital assets, smart contracts, protocols, and Dapp being built on the same blockchain. A DeFi functions with creating monetary for banking services such as the issuance of stablecoins, P2P facilities, and providing financial instruments services like trading, lending, payment, insurance, tokenization platforms, DEX and so forth on the blockchain.
Why DeFi over traditional finance?
Traditional finance is centralized meaning it is controlled at every stage and aspect by the centralized institutions. Traditional finance has a protocol to follow which they are meant to adhere to such as documentation, KYC, banking procedural and so forth. It also includes the part that various banks across the world will always have some of the other measures for banking in a different set of procedural systems. Because traditional finance is centralized the users have to be dependent as the power lies with the institution.
However there is a drawback too, such as the economic crisis of 2008, it was in a way a reminder that even the centralized institutional power can be at stake risky. Also, there are various other restrictions with the bank such as if the people are unable to repay the loan amount however many banks also have the solution to bail-in.
Also Read, Will Bitcoin Ever Replace Fiat?
Why DeFi - its pros and cons
Decentralized Finance if let prosper can turn out to be a boon for various purposes.
- DeFi facilitates decentralization that enables participation for everyone.
- The utilization of blockchain for the infrastructure of technology facilitates various features of blockchain such as immutability, speed, low-cost transactions, automation of the contract and so forth.
- It facilitates transparency and efficiency of the price and market along with minimal risk.
- DeFi allows its user’s private keys to be in the possession of with themselves which can also be called non-custodial meaning that the user in complete control of its money.
- DeFi enables financial inclusion as it consists of a barrier to access DeFi products is low.
- DeFi products are supporting and contributing to enhance and innovate the new market’s ecosystem and also by providing new cases to use the cryptocurrency.
The finances of the people or we can also term users will not be controlled by the traditional companies but by the smart contracts. As per the DeFiPulse, it is stated that there is a total of $531 MM locked in the market of DeFi and 20 DeFi products totaled in Assets, Derivatives, Lending, Dexes, and Payment. While 53% of market share and funds of worth $281.8 MM with MakerDao being the largest product of Decentralized Finance.
Alex Pack, managing partner at Dragonfly Capital said, “The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way.”
However like every technology, it has several drawbacks too, such as not all the products consist of low barrier for entry such as with Lending, smart contracts cannot also be stated to be 100 percent secure even though it is impossible yet there is a slight change such as the DAO attack, many products are not completely decentralized as the backbone companies are centralized however they do not hold your private keys and the last but not the least would be the complex nature of crypto and blockchain, many people are alien to the concept, many find it difficult to understand and learn while many just do not want to take the risk.
DeFi and its future:
Decentralized Finance has its own ups and downs like any other technology would have however like how the Blockchain and Cryptocurrency boomed, does the question is if DeFi has a future? In the year 2017 DeFi with $4 crossed over $680 MM in June 2019 which is the stairway growth in just two years.
With the growth of cryptocurrency and blockchain, it can be said that DeFi has a future in store too.