Decentralized Finance is often hailed as the next big thing. The change that would revolutionize industries. Let us understand DeFi, its role in the current developments and how DeFi is reshaping the Finance industry.
Understand Decentralized Finance
DeFi is a Financial technology which utilises public ledger (Blockchain technology) to conduct transactions.
Decentralized means transfer or control of an activity to several local offices or authorities rather than one single one.
In traditional Finance industry, Governments and Banks have control over what you send/receive, how, in which currency etc. However, DeFi utilises Peer-to-peer technology to provide financial services. Therefore, no need of intermediaries. The intermediaries were also charging inflated fees for every transaction made therefore the need arose for a cheaper & faster finance structure that led to the birth of DeFi.
What DeFi Supports?
- Trade Assets/ Derivatives
- Earn Interest
- Buy Insurance
Why is DeFi important?
The main aim of DeFi is to reduce transaction time and give easy access to financial services.
Consider these simple scenarios to understand the importance of DeFi –
- You are travelling and using the bank services becomes complicated. Although you can pay through cards, still more transaction processed need your presence and takes lot of time
- Loan approval takes weeks and tons of paperwork. The process also involves few intermediaries
With Decentralized Finance, you only need an internet connection and you can easily transact from anywhere in the world. With DeFi you gain more control over your money. With simple keystrokes, putting in the ‘Private Key’, users can make any transaction from any part of the world. There is no need to provide personal details and fill lot of paperwork. You can do transactions anonymously. Although DeFi provides anonymity your transactions can still be tracked by the Government.
How DeFi works?
Applications based on DeFi are called DApps. Through these applications you can access almost all the services that a traditional bank offers. DApps run on Blockchains. A Blockchain is a public ledger which records all the transactions.
Individual transactions are recorded as blocks which are then verified by users. The blocks are then grouped together forming a chain. This is the most secure way to verify transactions as altering even a single block would mean changing the rest of the blocks and breaking the chain.
There are other utilisations which helped DApps gain popularity.
A glance at DeFi utilisation –
DEX (Decentralized Exchanges) utilitzes Smart Contracts to enable trading without intermediaries. In centralized exchanges, brokers or banks or government oversees the security & transfer of assets. However, with Blockchain development the need of intermediaries became redundant. It also prevents price manipulation or fake trading volumes.
Lending – DeFi has revolutionized borrowing & lending platform. Borrowers can directly take loan through lending platforms. Also lenders can earn interest on their crypto through DApps.
Staking – DeFi staking is where you can lock your crypto through smart contract and become a validator thereby earning profits from performing required duties.
Gaming – Gaming industry changed a lot in recent years with the shift in play to earn mode. DeFi made it all possible. Gamers can now monetize their play time and progress.
How DeFi is reshaping the Finance Industry?
DeFi platform is impacting various industries. Almost all the sectors of finance industry are changing and adapting to this new technology. DeFi is replacing traditional banking systems especially in areas mentioned above.
As more and more people are entering Digital/Crypto era, the way we do business is changing. Millennials want better, faster, safest services at lower costs. Rise of Web 3.0 would also help in developing DeFi space thereby reshaping the Finance industry.
Keep a lookout at this space for more info on DeFi, Crypto Assets, Web 3.0, Metaverse and more.