How Decentralised Finance (DeFi) is bringing in a revolution?
Updated On : May 2022
Decentralized finance (DeFi) entails a financial system functioning without any intermediaries, and operated only by the power of smart contracts. DeFi intends to bring transparency and the robust security of distributed financial technologies to traditional finance use cases, and also seeks to reduce the inefficiencies and solve the problems. DeFi is revolutionising the industry by replacing many of the current outdated processes and bringing in a decentralized and democratized financial ecosystem.
DeFi is based on a peer-to-peer philosophy and uses self-executing smart contracts on the blockchain network, and removes intermediaries from the system. Decentralized exchanges along with lending systems use the Ethereum network which was created to host programs.
DeFi democratizes finance replacing traditional centralised institutions like banks, NBFCs, and brokerages. The financial services that are used today like loans, insurances, savings, etc, could eventually exist on a blockchain and not in a bank.
Decentralised finance platforms come as an alternative system to the existing banking and finance systems. They are built to be free from their developers over time and eventually intended to be handed over to a community of users powered by having control over the protocol’s tokens.
The potential of DeFi can be best seen by understanding the existing problems that it could solve -
- It will help people who do not have access to open a bank account or use financial services. This leads to people being unemployed and sometimes not getting paid.
- There is no risk of the government and centralized institutions closing down markets at their will.
- Trading hours are often limited to business hours of a specific time zone. This will no longer pose a problem.
- It will be quick and cost-effective, solving the problem of time-consuming money transfers due to internal human processes and avoiding the premium charged for financial services.
- By removing the middleman and automating the processes, DeFi offers the promise of reduced financial intermediation costs and also opens up possibilities for new financial instruments best suited to the new economy. This leads to a paradigm shift in financial markets bringing in a revolution unlike any since the industrial revolution.
Let us take a look at the Features of Decentralized Finance (DeFi)
- DeFi reduces the chances of errors and increases efficiency using a computer code called smart contracts. It removed the middleman and provides easy and cheaper access to capital.
- Being on a blockchain network with an open-source anyone in the world with an internet connection can check and audit the source code and communicate using their wallets to avail of any service provided by DeFi like transferring funds, borrowing, lending, etc.
- Blockchain data being on the distributed ledger network cannot be altered, creating a trust less financial system that relies on code.
- DeFi has opened up decentralized crypto exchange protocols and is expanding its capabilities to become more robust in security and scalability.
- DeFi working applications are more transparent, secure, accessible, and affordable than the current system and provide wider access to financial services, allowing anyone in the world to be a part of the blockchain irrespective of wealth, location, or status.
- DeFi is leading to investment opportunities for large populations who were earlier excluded from investing in financial markets. Financial opportunities for the undeserved and unbanked are more accessible.
- DeFi is growing to be a strong tool for smaller businesses in the developing market, especially for small loans and remittances.
The year 2020 was a monumental one for DeFi with a dramatic expansion of the DeFi industry and highlighted its revolutionary potential to reshape finance. The total value clocked during the first half of 2020 has increased 900% from below $10 billion to nearly $100 billion in 2021. The growth proves the heightened enthusiasm of traders to be a part of this promising sector seeking ways to grow their wealth on a global scale.
The core values and the advantages of decentralization along with their underlying key technologies have shown their benefits and have already been adopted by some of the world’s largest centralized institutions. As larger and larger agencies join in and there is increasing access to networks, the profit margins will increase and businesses will grow. The old and new world of finance will blend leading to a more equitable and seamless world economy.