When cryptocurrencies first emerged in 2009, no one would have imagined how quickly they would grow and change the world of finance. Bitcoin, the world’s first decentralized currency, was created to enable secure, anonymous financial transactions. It used peer-to-peer technology on the blockchain, eliminating the need for intermediaries.
Today cryptocurrencies are widely accepted, and they are moving into traditional banking territory. Now, people use them, not just for transactions, but as investment vehicles too. Decentralized Finance, otherwise known as Defi, is easing the transition as the Defi platform gives users total control over their money.
What is Defi?
Decentralized finance or Defi is a collective term referring to a range of financial applications used for transacting with cryptocurrency.
Most Defi applications have been built on Ethereum platforms. This is because Ethereum’s blockchain technology lends itself to easily tailored smart contracts. These contracts transact automatically once certain conditions are met.
Ethereum is the second largest cryptocurrency after Bitcoin. The Ethereum smart contracts are easy to use and the platform will adopt almost any contractual conditions.
Reshaping How we Borrow and Save
Investors prefer stability and cryptocurrencies are notoriously volatile. Stable coins, issued by the Defi industry, take care of the volatility issue. Pegging a stable coin an asset, like fiat currencies held in reserve, gives it stability. This has made saving and investment less risky.
The business model of traditional banks relies heavily on lending and borrowing. So, funders offer loans and receive interest on money that would otherwise have lain dormant. Defi has made transactions between anonymous participants possible and there are no intermediaries. Anybody can participate from anywhere around the world. There are no barriers to entry. Little wonder that one of the most popular uses of Defi is crypto loans.
The initial premise of Defi was to enable cryptocurrency transactions without intermediary assistance. Defi now the platforms necessary to enable transactions between borrowers and lenders.
People saving on these platforms receive the benefit of real-time variable interest. Interest is based on supply and demand and users can withdraw their funds as they need them.
Defi Benefits
Though Defi is by no means risk-free, it does have many benefits.
There are 1.7 billion unbanked people across the globe and Defi gives these people easy access to financial services. Anyone can use Defi. You don’t need an identity document or proof of address. Because there are no intermediaries in the system, costs are kept to a minimum.
All users need to make transactions using cryptocurrency is access to a Defi app or dapp. So, anyone with an internet connection can transact with smart contracts. There is no fiat transaction that can’t be replicated with crypto. Loans, insurance, betting and derivatives are all available on Defi and there are no intermediaries claiming their cut. Transactions happen almost instantaneously and interest is regularly updated.
Traditional finance is centralized and its performance depends on centralized decisions. Defi, on the other hand, has no centralized management, so users have absolute control over their funds. Centralized management allows the authorities to manipulate interest rates, affecting users’ income. Defi overcomes this problem.
Defi transactions happen on blockchain technology. They are, therefore, both secure and can be traced back to the owner.
It is easier to qualify for a crypto loan than for a traditional loan. There are no credit checks since the loans are secured with digital assets. Acceptance is immediate, no waiting for approval. Interest is calculated based on supply and demand.
Defi is here to stay
Defi is still in its infancy. The term was only introduced in 2018, but by 2020 Defi was threatening to disrupt the financial industry. And it keeps growing in leaps and bounds with a current locked value of more than $90 billion.
There is no doubt that Defi will continue to attract new players as the need for inexpensive and secure financial transactions grows, and as organizations recognize their worth.
