What is DeFi?

DeFi, also known as Decentralized finance takes the components of traditional finance and decentralizes them by removing intermediaries and replacing them with smart contracts, it can also be described as non-custodial finance where the users have the keys for the assets they have instead of having a central authority for the same.

DeFi makes it accessible for billions of people to use the same services provided by the traditional banking system without being discriminated against, based on region or any economical barriers. It is estimated that approximately 1.7 billion adults don’t have access to the basic components of the banking system, with the help of DeFi such barriers can be broken and everyone can have access to such services.

Benefits of DeFi

Apart from making the same services as the traditional banking system accessible to billions irrespective of the laws of their region or any economical differences, DeFi also provides an efficient way or alternative to the traditional banking system as it’s based on the latest software which is highly efficient rather than the old slow banking system.

DeFi also removes the risk of corruption as it doesn’t have any intermediaries, the old banking system needs a large amount of manpower to operate, which also makes it very slow. But in decentralized finance, everything is automated by predefined protocol and code, making it fast, secure, and efficient free from any type of corruption.

DeFi provides services such as Lending, Borrowing, Trading using cryptography and blockchain which helps in settling all the transactions almost immediately, no matter how distant the two parties are, the transactions are settled in a fast and secure way free from any fees.

DeFi is a permissionless system therefore the users don’t need to submit any identification, anyone with an internet connection can have access to all the services provided by the DeFi platforms.

All the transactions are recorded on the blockchain, therefore, making this system transparent and secure since the blockchain is an immutable database that can’t be tampered with.

Unlike the old banking system where the banks hold the authority of deciding the interest rates, in DeFi the rates are determined by the supply, demand and risk associated with the asset.

Another benefit of DeFi is related to money transfers, in the old banking system the transfers across the globe can only be carried out with remittance fees which are as high as 30% also the transactions take almost a week to settle, DeFi provides an alternative way which is both fast as well as free of any fees to transfer money anywhere in the globe instantly.

An example why decentralization in financial sector is important-

All of us know about the Gamestop short squeeze that happened earlier this year, some of the exchanges temporarily halted the trading of the stock which barred many people from claiming their profits off the stock, this couldn’t have been possible if the exchange was decentralized. Decentralized exchanges run free from any influence and can’t stop the trading of any asset abruptly.

Cons of DeFi-

DeFi might be difficult to understand for people who are not so tech-savvy. It requires a basic understanding of how cryptocurrencies work and also some basics of blockchain which might not be easy for an average person to understand.

Sometimes the smart contracts have some bugs which might lead to the loss of funds of users.

DeFi platforms are also subjected to hacks, although there aren’t many instances of hacks where people have lost funds but it’s still one of the major threat.

Since it’s decentralized, anyone can create a platform with an ill intention so it’s better to do proper research on the platform before using their services.

Popular DeFi Platforms-

  1. Compound Finance
  2. AAVE
  3. Uniswap

Conclusion

DeFi will definitely change the financial sector rby providing it’s highly optimized, fast and secure services for carrying out the components of the traditional banking system. It’s only a matter of time till we see people using DeFi platforms in their day to day usage . DeFi will make it possible for the 1.7 billion who are barred from using the services due to not meeting up the criteria set-up by the traditional banking authority by giving them a platform which is accesbile to everyone and treating every user equally.

DeFi will democratise the financial sector and break the monopoly of banks who demand big amount of fees or interests for providing services. Although DeFi is still in it’s initial phase we are seeing a rapid growth in the locked amounts for the DeFi platforms.

DeFi is the only way we can make sure that people can enjoy the basic services of a banking system without being discriminated on the basis of their wealth , race or ethnicity. DeFi is a revolutionary technology which helps us in taking s step further in a free world