The Buzz About Decentralized Finance
Decentralized Finance or DeFi as it is known has been making waves over the last few months following the emergence of various platforms and products offering DeFi services. It is the hottest topic in crypto space that aims to truly decentralize the financial system, one that does not need the traditional banking system. So what is DeFi and how it works, let’s take a look.
What is the buzz about DeFi?
Decentralized Finance has become a trending topic in the blockchain community. It offers the decentralization of money just like Bitcoin and aims for a broader approach of generally decentralizing the traditional financial industry. The essential of the initiative is to open traditional financial services to everyone while providing permission-less financial service ecosystem based on blockchain infrastructure.
What is Decentralized Finance (DeFi)?
While DeFi has become one of the crypto buzzwords of 2019 and continues to do so, the question is will it live up to the hype. This is because it’s still in its early days, but DeFi certainly is making its way.
DeFi is a new decentralized financial system that is built on public blockchains and is reshaping banking, lending, and derivatives. The key here is to remove the middlemen eliminating centralized processes and breakdown geographical boundaries. Examples include the decentralization of information recording, decentralized risk-taking and decision making, and consensus mechanisms. In doing so, DeFi promises to improve efficiency, reduce costs, and make financial services more accessible to all.
With decentralization, the current infrastructure problem is solved. It removes the failure points and ensures that the records can be stored and shared among different nodes across the network. DeFi is based on decentralized apps (dApps) or protocols. By running these dApps on a blockchain, it provides peer-to-peer financial network without any centralized authority.
Rise of DeFi
As DeFi is built on Ethereum blockchain, it adds a layer of programmability to its blockchain. In 2020, individuals and businesses can borrow, lend, invest, trade, exchange, and store cryptographic assets easily thanks to the growing number of decentralized finance applications on the Ethereum network.
Potential Impact of DeFi
- Wider Global Access to Financial Services
With decentralized finance services, anyone with a smartphone and internet connection can access financial services. However, the current system has various barriers that prevent people from gaining access such as lack of citizenship, documentation, credentials, etc. High entry-level funds are needed to access financial services and vast distance from functioning economies and financial service providers.
DeFi services can help solve this problem by offering the same level of access to everyone from a top trader at a financial firm to a farmer in a remote region of India.
- Affordable Cross-Border Payments
DeFi removes the intermediaries that make remittance services costly thus offering affordable services to all. In the current system, sending money across borders is expensive and the average global remittance fee is about 7%. Through Decentralized Financial services, the remittance fee could be lowered to below 3% making it affordable for everyone to send money.
- Enhanced Privacy and Security
In decentralized finance (DeFi), users have custody of their wealth and can transact securely without validation from a central party. However, on the other hand, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it. Also, it offers security over data breaches. Mostly the companies suffer the consequences of compromised central servers and DeFi can help secure them.
- Censorship-Resistant Transactions
In a decentralized financial system, transactions are unchallengeable and blockchains cannot be shut off by central institutions like governments, central banks, or big corporations. In places with poor governance and authoritarianism, users can move to the decentralized financial system to protect their wealth.
- Ease of Use
Plug and play dApps allow people to automatically use decentralized financial services without the complexity of the centralized system. For instance, with a decentralized system, someone in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off their debt and purchase a home, all through interoperable apps.
DeFi has a great potential to take over the current financial market and the future is promising and we could see strong growth over the next few years.