If you are an avid financial reader or enthusiast, then you might have heard about DeFi and might even know what all the fuss is about. But there are people out there who don’t have even the first clue when it comes to demystifying finical terms such as DeFi, what it is, what it does, and what sector of the financial market it serves. If you want to know about DeFi yourself in detail, then this is the place to do so.
What is DeFi?
DeFi or decentralized finance is a type of financial system that is not tied with any centralized or government-controlled financial systems, it doesn’t have any such ties, and it runs independently. It is more like a concept than being a physical product as DeFi deals with financial products that are made available onto the public decentralized blockchain networks, and anyone can access these products, buy/sell or even trade these on the open market. It doesn’t have any third-party influence, and all the transactions made through this sophisticated system don’t even route through any government-controlled financial systems such as the banks, brokerage, or any market or platform of any kind.
Due to this very reason, there is no need to present with any kind of government-issued ID, social security number, or proof of address. This is not a bank that you are dealing with where you have to provide with all of that. In fact, this is the very place where, if you want, you can keep your identity anonymous without ever revealing it to anyone else as no one will ever ask for it. DeFi provides a system where the software written on the blockchains allows for the sellers, buyers, investors, and traders to meet/interact with each other virtually with the help of peer-to-peer interaction, thus the word decentralization.
There is no need for a middleman, a brokerage, or a trading platform of any kind, and these transactions taking place with the help of DeFi systems are cheap, affordable, don’t carry any hidden fees, and are the most secure transactions that could ever exist.
Decentralization; the Beating Heart of DeFi Systems
Behind the successful functioning of DeFi finance is decentralization. It is a concept on which all the cryptocurrencies out there get transacted; there are no records, no money trail, or information of the transacting parties up for grabs. It is the safest, cheapest, and fastest way to transact crypto money from one place to another. To achieve decentralization which is not having the financial attributes of the cryptocurrencies and other digital assets along with DeFi systems recorded, tagged, or tracked by the authorities, government, or the third parties, a system of computers is designed that are interconnected with each other.
This decentralized system is called nodes, and it consists of computers and smartphones, and other equipment that can be connected with the internet and carry remarkable processing power. These can be servers even, but the giveaway point of this whole concept is that these are privately owned and are not controlled by a single entity. Other than that, this peer-to-peer interaction makes it easier to proceed with DeFi finance and doing transactions in real-time while claiming all the anonymity in the world.
Other than that, there are a lot of technologies and protocols at play here that achieve the goal of decentralization, as explained earlier. Blockchain is but a proprietary software along with smart contracts that will draft up the terms of the deal taking place between two parties electronically, so one thing is for sure that there is no manual input of any kind and thus no such parties involved to make it happen. It doesn’t matter what kind of technology was used to carry out the transaction; the main getaway point with the DeFi systems is that it removes the need to have such parties involved at all.
If you think that DeFi is a complete system that has been developed in its entirety, then it is not like that; DeFi is still being developed while it is fully functional and serving the community for digital transactions involving digital products without involving others people into the mix. The volume of the trading tokens, along with the money that is locked into the smart contracts, which depict individual transactions that have been scheduled to go through with the help of the DeFi systems, has been growing in number ever since.
If you are worried about the regulation or oversight, then you can simply put your mind to ease as there is almost minimal to no regulation involved, and all the claims that it is not over-watched or its interests shared with any third party are indeed true. The future of finance belongs to DeFi, and the day will come sooner than later when it will completely overtake the current centralized finance of the modern world.
Concepts Behind DeFi
The very concept behind DeFi is not that new as a similar model is in effect currently as most of the transactions at banks and other financial organizations still take place through technology. But there is one groping difference, and that is DeFi completely defies the centralization practices imposed by banks and other financial infrastructures that involve keeping tabs on their customers and logging every ounce of data related to any transaction that they have done in the past, are doing in the present or about to commence into the future.
Technology has not been given the free role here as the financial solutions or companies of the present still have to go around a long route of navigating their way through various jurisdictions, competing with the financial markets of the present and complying with different standards to make a transaction possible but that doesn’t happen in case of the DeFi systems. DeFi, on the other hand, uses the common software protocols and the public blockchain systems that are peer-to-peer to make things happen; it favors technology at the front, in the middle, and even at the end of each and every transaction that is taking place through the DeFi systems.
The Financial Model of the Present Brings the Essence of the Past
The overall working of the traditional systems of the day is based on the “hub and spoke” model. According to this model, all the financial representation is done by the hubs that connect continents through their beating financial centers such as in New York or in London, and then the smaller workload is then managed by the help of spokes which represent, say, capital cities of the world such as Mumbai and Milan. These might not be as important as the hubs but provide a lot of meaning to the economies these represent.
The prosperity of the economy or the hardship that it faces kind of radiates from the hubs to spokes and then towards the rest of the global economy. This is a model that represents nothing but interdependency, and the same model is used by organizations and financial establishments of the modern world, everything is logged, everything is recorded, and to make decisions, regulation and jurisdiction need to be considered while none of this is present in terms of the DeFi systems.
These companies have the headquarters in hubs and even the local branches and, partnerships and even some investment across the world. All of this means that there are subjective laws and regulations that need to be upheld considering in which region of the world a certain business needs to take place, the laws and regulations of that territory will apply to whatever transaction that is in the works and the involved parties would have to comply by these.
This type of model might have worked elegantly in the last century or so, but all the financial crisis and recession did reveal all the flaws that this system carries, and it doesn’t matter how sophisticated or well-articulated this system might become the presence of these flaws can’t be masked here. The problems of the bigger financial corporations out there and the plots that were executed and taken into effect to balance the sheets sent out a domino effect that did tumble economies rooted the mere perception of happiness and prosperity out of the ground and tore every financial beam or strand the model carried to give common person a sense of hope away.
On the contrary, the DeFi or decentralized finance is free from all this jingle of problems and uses technology against the centralized systems and makes its services available for each and everyone regardless of their race, region, or background. This is the system that is as transparent as things can go, a system that people build for the people that is free from the intertwined webs and plots of governments, law, and policymakers who want to confine the right to privacy from everyone.
All the DeFi services and apps are built on the public Blockchain, which means that no single entity is in control of all that is taking place on the DeFi systems, people can have more control over their finances with the help of personal digital wallets, which not even the government can reach. All the services provided by DeFi systems are catered to the needs of the individuals rather than serving corporations.
What is Wrong with Traditional Finance?
There are many different problems going about with the traditional financial systems; the most elementary would have to be how slow and expensive these are to run and maintain, and unlike the decentralized systems, these are susceptible to hacks and data breaches. If anything happens to the financial institution that is keeping an eye on all the interests of their client and something happens such as the regulatory fee imposed by the government suddenly increases or there is an attempted security breach, then all the pressure will be on the clients.
But in the case of the DeFi systems, all of the apps, digital data, software, and even the finance is locked securely into the decentralized nodes or systems running the whole network, and that is why it is potentially free from all these possible problems that mingle with the centralized finance solutions.
There are also millions of people out there to whom the traditional financial systems remain inaccessible because they don’t meet the criteria to open a bank account, and that is kind of a problem because they, unlike many other people out there, want to do financial transactions but due to the limitations imposed can’t get around these. Therefore these and many more can turn to the DeFi systems and find a rather easier, foolproof and easily accessible solution to their problem.
Another great quality of the DeFi systems is that they don’t discriminate between the class and financial situation of the users; anyone is welcome to make a transaction with the most secured financial system out there. Also, they can do this rather easily, cost-effectively, and in a fast fashion on the plus side of things.
The DeFi ecosystem has been growing consistently, and as it seems, it has reached a potential all-time high regarding how many people are using it out there and how content they are with it. Currently, Ethereum’s blockchain is the largest out there, and it is being used for a variety of purposes; a lot of DeFi apps, finance systems, software, and markets are flourishing inside of this single and most exemplary Blockchain that serves millions of people around the globe.
The Ethereum Blockchain is also termed the next internet based on its performance, such as decentralizing many financial services and programs out there while bringing awareness and agility in the hands of the common people. The opportunities regarding DeFi are limitless at present, and that time is not so away when DeFi will define the current financial system and make things even easier and convenient than these are at the moment.
Advantages of the DeFi Systems
There are a lot of benefits that DeFi systems lend to the common people; some of these might even feel the most prestigious and not so possible at first, but these are real and you can have your fair share of these as well working with the DeFi systems. So, without further a do following are some of the advantages of the DeFi systems that you should be looking out for.
- No Human Error
Humans make an error, but the digital systems designed by humans seldom do. There are even dozens of cases in the past regarding the central finances that will explain to you that how due to human error or mismanagement, catastrophes have happened, such as the financial crisis due to the mismanagement of the central banks and the third-party intermediaries. But in the case of the DeFi systems, the smart contracts are of the essence, which will certainly eliminate the human error from the equation, making your transactions rock solid. The only catch here is that these digital contracts should not be written poorly themselves, and if that can be worked around, then you get seamless transactions without any errors.
- Instant and Permanent Process
Think of it this way; before the DeFi systems were around, the loan clearing process with the banks or other financial mediums would have taken you a great time, but with the help of the DeFi systems, you can take a loan with the help of a single click how speedy and efficient this is. All you need to have as a prerequisite to connecting with the DeFi systems is an internet connection, take this obstacle out of your way, and you have got yourself consistent and permanent access to the market.
- Healthier and more Economic
Global shocks and other situations such as this current Pandemic, for instance, have shown the world that how inconvenient and vulnerable the traditional or centralized finance systems are. This is because these systems are developed through direct contact and linking between people, or if you come around the fact that these depend on people to keep them running, that too won’t be a wrong analogy. The level of manual effort or involvement required to keep the wheel of the DeFi systems running is next to nothing, and with sincere effort, it can even drop to zero, so even if there is no human input to oversee things, the DeFi systems will keep on operating at their best.
- No Need for Permissions
Suppose you call the DeFi to network something that is permissionless that it would be right on the mark. Unlike centralized finance that requires a lot of regulation and has to attend to jurisdictions, laws, and operational policies, the DeFi network doesn’t require any of those. There is no approval of any kind as you very well sign up with the network this minute and start making transactions just like that.
DeFi systems are secured, up-to-date, and, more importantly, the next best thing the world would have to adapt, even if this process takes a few years. DeFi is like a revolution that is now in motion, and soon it will reach where it is supposed to. Smart financing can turn this world around and can do better for the economies and for the people who support these and are definitely in pursuit of a financial revolution.