Delhi: 2020 has been a dramatic and powerful year for the cryptocurrency space as a whole: Bitcoin’s crashes and surges, seem to be paving the way forward for further growth of the crypto space. However, there’s one part of the crypto sphere that’s charged ahead of all else- DeFi.
The traditional finance market is centralized. Central authorities issue the regular currency that drives our economy and used for every trade like the government and banks. Therefore, the power to manage and regulate the flow and supply of such currencies in the market resides to them. We also pass the control of our assets to various financial organizations like banks in expectations of getting higher returns. The problem with this is since all the control and fund is centralized, the risk is also at the center. All the issues arise because of the centralization of the finance that underpins the global economy, but it is definitely not an open system. The solution is to decentralize.
Bitcoin and other early crypto coins have offered a way of secure peer-to-peer trading without the need for intermediaries like a bank for trade settlement. This gives users complete control over their assets.
However, keep in mind that these cryptocurrencies have not really decentralized the financial system. They have just decentralized the issuing of money and its storage. There are a couple of problems exist which are hindering blockchain from making the financial system genuinely decentralized.
DeFi is short for Decentralized Finance. Decentralized Finance includes:-
- digital assets
- protocols
- smart contracts
- and dApps built on a blockchain.
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Decentralized Finance (DeFi) has been making waves over the last several months following the surge in platforms and products offering DeFi services.
- DeFi is a movement predicated around creating global, permissionless financial applications.
- The idea of DeFi is that financial institutions can be created to run by computers, blockchains, and rules that anyone can access free of gaining permission or having to show trust or be trusted.
- These cyber financial institutions should be capable to run on a network of computers anywhere in the world.
- DeFi solves this problem by processing transactions using the blockchain. Not only does this cost a fraction of standard remittance fees, but it also sends money faster than standard financial networks.
- With DeFi, an employee in Europe can send funds to his family in Asia for less than a dollar and have the money received in less than 30 seconds.
- It can assist in generating credit and creating a loan for yourself: DeFi technology can enable the user to “own the whole experience in that they are their own bank, using their own assets as collateral.
- Additionally, DeFi can be used to transfer credit - users can engage with the traditional payment rails (Visa, etc) or use the public blockchain to exchange funds around the world in an instant.
- DeFi platforms can also be used to store credit. Instead of trusting money to managers of banks or funds, users control where their money sits and how they use it.
Col. Inderjeet explains, "DeFi is offering you control of your own assets - and yes it can because of decentralization and blockchain technology. Though many new-age banks and fintech firms promise to provide more control to the users, in reality, you are still trusting in them to manage your funds. Also, many developers of financial apps are adopting open-source protocols for trading through decentralized exchanges. Anyone can store, trade, and invest their assets in blockchain securely and earn a much higher return than from the traditional financial system. Since there no intermediaries handling your asset, you have complete control over your investments."
In a functioning decentralized financial system, an internet connection would be the only prerequisite to accessing financial services, rather than geography or circumstance. A reduction in the centralization of those that control and own the infrastructure underpinning financial markets would increase transparency, decrease costs and reduce the opportunity for censorship and / or manipulation.
Global “unbanked” (both individuals and enterprises) would gain access to financial services.
- DeFi would not only facilitate markets for illiquid financial products that already exist but would also allow for the creation of new financial products and markets that don’t yet exist. The ability to more effectively arbitrage, borrow, hedge, and access liquidity would spur more institutions to join the movement without restricting the usage of these products and markets exclusively to them.
- DeFi ecosystem offers a range of innovative financial services like lending, token issuance, insurance, banking, etc. It is an open-source, permissionless, and transparent network. In these types of systems, users get to have full autonomy over their assets while being connected to a whole spectrum of peer-to-peer decentralized applications (DApps).
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Col. Inderjeet further adds, "With any high return product, there is always some risk involved and DeFi has its fair share too. Securely handling cryptocurrencies and finance tools require specialized knowledge, so of course, there’s a risk factor involved. It’s the user’s responsibility to keep their key and holdings secret, use a hardware wallet and multi-factor authentication."
- DeFi market is tiny compared to traditional finance, but it has picked up its pace rapidly since last year. As the industry matures, more resources will be allocated to build DeFi solutions.
- DeFi delivers where other platforms failed. As the industry matures, more resources will be allocated to build DeFi solutions. Currently, there are a handful of exciting developments and projects, either recently launched or launching soon, that have the DeFi community excited, and for good reason — community involvement is at the core of DeFi and one of the leading advantages over the traditional financial services markets.
- DeFi has the potential to completely reinvent the world’s financial systems, merging the scale and familiarity of the traditional economy with the security, efficiency and transparency of the public blockchain. The security, efficiency, and transparency inherent in the public blockchain will allow for innovation and growth like we haven’t seen in modern times. Also Read: Paradigm shift in future e-voting through Blockchain
You can follow Col. Inderjeet on twitter @inderbarara, insta:inderbarara
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