What Defi Is About And Why Is It Important
Decentralized Finance (DeFi) is rapidly getting more attention in the global financial system; pumping in new oxygen into the world of FinTech, cryptocurrencies and digital assets. This break-out trend of 2019 is using blockchain technology to decentralize core traditional financial services such as lending, borrowing, savings etc. DeFi has cut-off paperwork and middlemen, replacing them with smart contracts. This disruption of the traditional financial instruments has brought freedom from the onerous fees and controls of the banking oversights, giving access to billions of people across the globe to financial services such as savings, loans, trading, asset management, exchanges, insurance, and yield farming –staking.
The most popular of these DeFi services are decentralized money markets, decentralized exchanges, insurance and stablecoins. Most of these services are created on Ethereum platform and could also function on other platforms with smart contract capabilities.
It’s interesting to note that, as at 19th January 2021, the total value locked (TVL) in DeFi sector as provided by analytics website “DeFi Pulse” has hit a record $23.938 Billion. In spite of this astronomical growth recorded over the past one year, the adoption still remains very low.
Few understand the basics of how it works- especially in the context of improving their finances. Here’s everything you need to know to draw a conclusion whether this trending innovation of 2019 is for you. So let’s look at what’s DeFi and why it’s important.
So what is DeFi?
This is a decentralized financial system built on smart contracts to recreate traditional financial services in a decentralized architecture, outside of any control of government or legacy institutions. Now, users can find financial services on the distributed ledger for savings, loans, trading, exchanges, insurance, and yield farming –staking.
In DeFi, there’re no barriers to entry unlike the traditional financial setup where users face hurdles to open account, request loan and overcoming KYC issues.
Anyone with programming skills, can put his/her programming skills to work by setting up a dApps and start issuing financial services on a blockchain technology. That’s how simple, DeFi has the made the entire stuff to be. This shows that, DeFi is programmable, flexible, open source, decentralized, interoperable, immutable, transparent and permissionless.
Several mid-range DeFi assets had their share of the spotlight of recent, doing exploits in various DeFi use-cases like lending & borrowing, mortgage & Insurance, tokenization, margin trading, decentralized exchanges (DEXs), savings, payments, asset management, marketplace, development and infrastructure tooling. Examples of such Defi assets include Chainlink, Aave, Synthetix, yEarn, Uniswap, Compound, MakerDAO and many more.
Why is DeFi important?
DeFi has become an important tool for financial system based on the following:
Inclusive Global Access to Financial Services
This is a huge in having DeFi on board. The larger population of people across the globe especially in the rural areas, remain unbanked – without an account at a financial institution or via a mobile money provider. Through the application of DeFi, people who have access to internet could access financial services such as savings, borrowing etc.
You have control over your resources
There’s no central authority to regulate or validate your financial dealings. The system is decentralized and transactions are immutable.
In countries with poor governance and corruption, users have the opportunity to move to a decentralized financial system to control and protect their financial resources. For example, most people in Africa and Venezuela use DeFi applications to protect their financial resources from hyperinflation and government’ manipulations.
Affordable Cross-Border Payments
There are vast network of intermediaries involved in cross-border transactions which makes, sending money back home to relatives becomes a herculean task and expensive. Decentralized finance (DeFi) removes such costly intermediaries, allowing remittance services to be much more efficient and affordable for the global population.
DeFi is a financial service that has multiple use cases
DeFi has a vast range of use cases such as savings in interest-bearing accounts, borrowing, lending, staking, derivatives, insurance, synthetic assets and many more that offer great potentials to those interested in applying them in their financial dealings.
Improved Privacy and Security
With DeFi, users are custodians of their financial resources and can transact securely without validation from any central authority. In a DeFi system, financial instruments are made accessible via a completely transparent and auditable public blockchain.
Ease of Use and Frictionless Transactions
DeFi applications are plug and play that allow users to intuitively use decentralized financial services without the complexity of the centralized system.
The DeFi space is expanding, even though, many of the DeFi applications are still not the ideal choice for many people. The DeFi project is built for a decentralized trustless alternative financial system that could make financial systems more efficient.
In all of these, the intruders are becoming more sophisticated, which implies that, financial literacy is key to avoid pilling dumb money for dubious elements.
This content is not intended to advice readers on any investment, legal or tax. You’re strongly adviced to seek help from your financial or tax advisor before making any financial decision. The publisher will not be held responsible for any loss incurred as a result of reliance on this content.