Decentralized finance, or "DeFi," refers to financial services that provide many of the same features as traditional banks - like earning interest on your money and borrowing from others - but without middlemen who take a fee or charge interest, paperwork, or privacy trade-offs. A chartered accountant and Blockchain do not have much in common, but they are starting to as DeFi and FinTech take over. Instead of relying on financial services like banks, users can utilize smart contracts on blockchain. Cryptocurrencies ensuring even more ease of use for DeFi users, providing the hottest speeds, fees, and transparency. Defi and digital currencies are growing in popularity thanks to the perks of Blockchain technology. Let us get more into the concept and how it caters to a larger audience.
The aim and use of DeFi
Decentralized finance is the future of financial services, and it's already here. The aim of DeFi is to provide a decentralized financial services platform that is open and accessible to anyone in the world, using tech like crypto to help advance the everyday life of anyone and any business willing to give decentralization a try.
In the past decade, we've seen a rise in peer-to-peer lending platforms such as Lending Club, Patreon, BTCJam, and an explosion of digital currencies such as Bitcoin and Ethereum.
All of these developments have taken us one step closer to the decentralized future of finance that we've been dreaming about, but there's still more work to be done.
What's wrong and how can DeFi fix it
Many institutions in the financial sector are slow and expensive when it comes to providing basic services like payments. Online lender contracts can charge interest rates as high as 30 percent, and the global remittance industry charges fees that can be as high as 12 percent.
These fees and delays mean some of the most vulnerable individuals of our society are paying the highest prices for financial services when they need them most. While the traditional financial system can be slow and expensive, it doesn't have to be this way. Decentralized finance (DeFi) is an emerging category of services where trust intermediaries such as banks are replaced with cryptographic code and smart contracts, which reduces costs for everyone involved - especially when it comes to international payments.
DeFi is a new category of services that are globally accessible and built on top of blockchain infrastructure, without any charge or barrier to entry. It's also much more secure than traditional financial systems because the technology used isn't connected to a central server that can be hacked. DeFi users smart contracts applications to ensure ease of use and instant transfers of information and funds.
Your money is always yours; it's just moving from one smart contract to another. No permission from an intermediary is required in order to use it. All you need to do is have a cryptocurrency wallet, computer or mobile device, and internet connection like everyone else using DeFi services today.
DeFi isn't coming, it's already here
When you ask yourself, "where is DeFi going?", the answer is simple: everywhere. DeFi can be used from every corner of the world, and it's already available today. Innovation at its finest.
DeFi services are not theoretical. They're already being used by real people today to make real asset payments, earn interest on their digital savings, and borrow money from both friends and strangers, all without ever going through a bank or traditional financial institution. Whether you are investing, a money maker, or an asset holder, the shift to DeFi is inevitable.
Blockchain technology provides the first-ever opportunity for these separate building blocks to come together in order for the entire financial system to work seamlessly without any intermediaries, so it will only get better with time. From an economic standpoint, DeFi offers better rates and all the perks of FinTech. Cryptocurrency assets like Ethereum have seen plenty of investment opportunities arise as DeFi and Blockchain merge.
DeFi pros and cons
In order to get a complete picture of what DeFi is, it's important to understand all the good and bad parts that we are facing now. So let's dive into the details.
- The interest rate on savings and money lending is relatively high, just as it would be without intermediaries.
- Financial services are more accessible than in traditional bank systems because there aren't any barriers to entry, like non-existent internet infrastructure or bank account fees.
- Transaction and disruption times are much faster because DeFi transactions can move directly from peer to peer without having to go through intermediaries.
- Some transactions might not be as private due to the public records of smart contracts on a blockchain (keeping that in mind, transparency is always beneficial). This however increases security because fraud or reversal can't happen.
- Access to DeFi services can be limited if you live in a part of the globe where these services aren't supported or don't have high enough adoption rates, as compared to traditional banking systems in developed countries. Regulator issues may also occur.
- There isn't a built-in mechanism for handling consumer disputes between peers because the technology simply wasn't designed with this function in mind.
- It's difficult to understand what you're getting yourself into when joining a DeFi service, since it varies from one application to the next and is based on new technology. This doesn't have to be the case in the future.
As of now, it's still the early days for DeFi and there are some challenges to overcome before we can look at it as a real alternative. There's still a lot of work to be done, but it will all pay off in the end.