DeFi or Decentralized finance are those financial services that are provided through decentralized platforms and not controlled or managed by any single entity, but through a public and an open IT protocol. DeFi platform proves to be a promising revolution in the blockchain space that can ultimately lead towards wider adoption.
DeFi is to finances what cryptocurrencies are to money. It brings decentralization and digitalized trust to finances.
The term Decentralized finance or DeFi goes way back to the late 2018, when a movement of fifteen decentralized projects set towards a common goal of creating a more open financial system that doesn’t need to rely on traditional banks.
DeFi ensures that the individual is the sole custodian of their assets at all times by providing a range of common financial vehicles and marketplaces.
What Is DeFi and Why Do We Need It?
The current global financial system proves to be inefficient in multiple aspects. Even though with so many financial intermediaries present in the system, a user can still face countless security risks.
A growing number of cyber-attacks leaves the public at risk of financial loss and data exploitation. Moreover, the existing financial system deprives millions of people from basic financial services due to barriers such as location, wealth, and status.
Even in the current crypto space, although protocols are decentralized and based on consensus algorithms, many access points to the system, like exchanges, are still centralized.
In addition, many crypto projects are managed through centralized organizations or companies often lacking transparency or accountability, while hiding the development of new parts of the ecosystem.
No wonder fields like finance and cryptocurrencies, where participants MUST have high degrees of knowledge and access to enter, are not yet open in the world. Due to this, blockchain has not yet still opened up finances.
DeFi in this regard is an ambitious attempt to decentralize core traditional financial services such as trading, lending, investment, wealth management, payment and insurance on the blockchain.
DeFi’s ultimate aim is to open traditional financial services to everyone, to provide a permissionless financial service ecosystem based on blockchain.
Yes Can DeFi Be Mainstream!
DeFi is instantaneous easy to get started with. You don’t need any papers or proofs to start. If you live in countries when it’s hard to open bank account, with DeFi there are no such obstacles.
It’s transparent because smart contracts are open-sourced so you can check exactly on what the contract does. The most unique component of DeFi is interoperability. It is possible to combine two or more DeFi products and create a new one.
Moreover, DeFi cannot be manipulated, i.e. once a smart contract is uploaded on the Ethereum network it cannot be altered, arrested, tampered with or counterfeited.
Decentralized applications are completely predictable, i.e. their behaviour always follows the instructions contained in their computer code.
DeFis can be publicly verifiable by anyone through any public blockchain explorer. They are open source, anyone can access the code and check in detail on how everything works.
All these cool features make DeFi tools absolutely unique because never before has it been possible to create financial platforms that cannot be manipulated in any way, cannot be restricted, hindered or stopped, and which are completely predictable and publicly verifiable by anyone.
DeFi and Traditional Finance: Replacement Or Complementary?
For a broad adoption of decentralized applications, DeFi needs to overcome major obstacles. To fill the gap between theory and practice DeFi has yet to overcome its core roadblocks have somewhat stifled adoption such as:
- Low liquidity
- Unintuitive UX and accessibility
- Capital inefficiency
- Hidden risks
Although DeFi is a great innovation, but that does not solve all the problems of the financial world and cannot completely wipe out traditional finance.
Rather, DeFi and traditional finance can contribute together in a complementary way to offer users innovative financial services that already allow them to do things which until a decade ago were unimaginable.
Promising DeFi Use Cases
Some of the most promising and advanced DeFi applications are:-
- Decentralized exchanges- 0x or KyberNetwork,
- Non-asset-backed stablecoins- Dai
- Smart contract-based asset management funds- MelonPort
- Tokenized debt platforms- Dharma
- Tokenized platforms for lending and borrowing- Compound
The adoption of blockchain technology and the spread of crypto-based financial services would shape a new world of decentralized finance.
DeFi can recreate traditional financial instruments in a decentralized architecture, outside of companies’ and governments’ control. This world would be characterized by wider global accessibility to financial services, safer transactions, and lower transaction costs.