Money and its transaction has been in existence since the beginning of mankind in one form or the other and has evolved with the evolution of human civilization. Cryptocurrency is a new improved avatar perfecting these transactions!!
A number of crypto platforms have emerged with different ideas and models but with a common intent to make financial services accessible on a global scale.
Cryptocurrency is emerging as a global partner making payments universally accessible to everyone, no matter where they are in the world and with whom they want to transact.
The Decentralized Finance (DeFi) or Open Finance technology takes that promise a step further.
Imagine a global, open alternative to every financial service you use today, be it savings, loans, trading, or insurance; accessible to anyone in the world only with access to smartphone and internet connection!!
Let’s explore various aspects of Decentralized Finance.
What are Smart Contracts?: Where our traditional financial system runs on centralized infrastructure and is managed by central authorities, Decentralized Finance is powered by a set of codes running on the decentralized infrastructure of the Ethereum blockchain known as Smart Contracts.
In smart contracts, the CODE controls the execution of each transaction. The verification takes place automatically through the code when the agreed terms are executed. Each transaction is traceable, transparent and irreversible. Code allows transactions to be complex formulas as needed. As an example, imagine your home mortgage rate is the variable Interest rate of the central bank + 1%; a smart contract enabled mortgage payment will check the central bank interest rate every quarter and add 1 % to it, and deduct an appropriate amount of ethers from your blockchain wallet.
Benefits of Decentralized Finance:
DeFi is developed on top of a blockchain. This means that it inherits the decentralisation, security and transparency that comes with blockchain technology. It’s core benefits include:
Decentralized Finance promotes autonomy. The money and assets that you own in a DeFi ecosystem are yours and yours alone. There is no centralized authority, such as a bank, with the ability to freeze your account, seize your assets, or block your transactions.
Completely decentralized in nature. It eliminates the requirement for intermediaries or middlemen.
Since it is built on top of a blockchain, it enables speedy and low-cost transactions. Blockchain provides tamper-proof coordination of data through the open architecture. It enables privacy and auditability with transparency.
DeFi applications provide an extremely secure private key to its users. The user is in full control of the money without having to rely on a third party. Increasing transparent ecosystems and thus trust.
DeFi has the characteristics of providing cost-effective, permissionless access to services, contrary to conventional finance. Anybody can get access to DeFi applications with a cryptocurrency wallet and the internet. It enables access regardless of geographies and without requiring a minimum amount of funds.
DeFi Use Cases:
While it’s true that Decentralized Finance is still in its developmental stage and is evolving everyday. Despite the fact that there is a long way to go in achieving its objective,there have been several prominent use cases of DeFi so far where it has achieved massive success.
Borrowing and Lending Platform:
One of the most general types of software that are a product of the DeFi system are lending platforms.Similar to a bank, users deposit their money and earn interest, if someone else borrows their digital assets. However, smart contracts are used instead of third parties to dictate the loan terms. These contracts are also responsible for connecting lenders and borrowers, and distributing the interest.
Compared to the conventional form of credit, it is quicker in terms of payment of loans, collateralizing the digital properties and minimizing the counterparty risk.
DEXes/ Decentralized Exchanges:
The most broadly known application of DeFi so far has been the DEX, or decentralized exchanges. Decentralized exchanges are, of course, cryptocurrency exchange platforms that allow all users to perform P2P (peer-to-peer) transactions between themselves. Users can therefore control their own funds without a central administrative figure watching over.
DEXes provide increased liquidity, safeguard all personal data of the users and their funds against threats of hacking and also lower the risks of market manipulation by a considerable margin. Another key feature of DEXes is that they allow physical assets to be tokenized.
Thus, the exchanges are swifter and safer compared to traditional trading methods.
A token, in the case of DeFi, is a virtual asset minted, issued, and managed on a blockchain. Digital tokens are securely coded so they can be transferred instantaneously and are programmed to carry a bunch of functionalities. Digital tokens have come out as a secure way for users on DeFi platforms to store their asset values, and trade without ever risking the actual assets.
Stablecoins are essentially cryptocurrencies. The only difference is that the value of a stablecoin can be tethered to the value of another cryptocurrency, a physical currency like the US dollar, or even the price of a valuable physical asset, like gold. The primary goal of stablecoins is to reduce the risks associated with the price fluctuations of a regular cryptocurrency. They also offer price stability. Currently, most stablecoins exist as tokens on the Ethereum blockchain.
Finding beneficial exchange platforms, strategizing and distributing assets for portfolio diversification, and keeping track of all investments and trades across multiple platforms can be fairly complicated. This is where DeFi asset management tools come in, which include virtual apps and wallets for securing and managing financial assets on behalf of the users. This includes buying, selling, moving cryptocurrency from one system to another, and earning interest on deposited assets.
In synthetic properties, prediction markets, and wealth management systems, various DeFi implementations have emerged. DeFi boosts the functionality and reach of money while providing a financial system that is more open and liberalized than ever before. The DeFi market is quite small in relation to traditional finance, but it is expanding at rapid rates. This creates much hope for a financial revolution that supports decentralization and transparency. It takes us one step closer to democratizing the global economy, making money and payments universally accessible to everyone.