What is Decentralized Finance (DeFi)?
Millions and millions of transactions are made daily with the use of decentralized tools. From the creation of the first DeFi use case (bitcoin) in 2009 to the creation of other DeFi protocols, DeFi has provided avenues for millions of people around the world to transact without the need for third parties.
What is Defi?
Defi, being the short form for decentralized finance simply means a decentralized system where financial transactions are performed without the need for a central authority or third party. It is a concept birthed from the rise of cryptocurrency.
Spanning across the utilities that web3 and blockchain technology provide, DeFi makes use of these technologies to eradicate the need for third parties in financial transactions.
Decentralized finance Vs Centralized finance
To better understand the concept of decentralized finance, let’s dive a little into the difference between centralized and decentralized finance.
Centralized Finance
Centralized Finance (CeFi) as the name signifies, is a situation where financial transactions are authorized by a central authority or a governing body. Our money deposit banks and our current financial system are perfect examples of a centralized body and how centralization works respectively.
Here, these authorities make decisions and rules regarding our deposit and withdrawal abilities with a daily limit to the number and amount of transactions (in monetary terms) we can perform on our account.
On one occasion when I had to open an account in a bank, I was given a certain limit on the amount of cash I could have in my account. If an amount greater than the stipulated amount is credited to my account, it will immediately be frozen until I perform certain obligations on the account.
But that’s not the case in decentralized finance…
Decentralized Finance
Unlike CeFi, Defi presents a solution where you’re your own bank and banker thereby putting power in your hands to do whatever you desire with your finances without a central authority placing restrictions or limitations on your finances.
It eliminates so-called intermediaries in the financial system.
Unlike traditional accounts where you have bank accounts and account numbers, in DeFi, you make use of wallets and wallet addresses. That is, payments are made from one wallet address to the other.
In contrast to a ten/eleven digit account number, wallet addresses are a combination of twenty-four to thirty-six alpha-numeric characters that can be used to send and receive funds.
What currency fuels DeFi
The rise of bitcoin and other alternative coins brought about a disruption in the financial space telling the need for a more decentralized space.
Thanks to DeFi, transactions are now being carried out without the need for intermediaries with the use of cryptocurrency. This is done as transactions are stored between nodes through a peer-to-peer network with the use of the blockchain.
People now see how they could take control of their finances without the need for regulations by a central authority.
Bitcoin and Ethereum are the two most popular cryptocurrencies that fuel the decentralized finance ecosystem.
Features of DeFi
Just like CeFi popularly known as our traditional finance (tradfi), decentralized finance has the following features but is not limited to:
- Peer-to-peer transactions
- Lending and borrowing
- Savings and interest
It should be known that for every feature traditional finance offers, DeFi creates even better utility.
Advantages of DeFi
The advantages of DeFi are numerous. Just as traditional finance has its merits and demerits, so does DeFi. Its advantages are:
- You have sole control over your funds as you are your own bank and banker.
- You have freedom over your finances.
- There is no central authority monitoring you.
- It eliminates outrageous fees as opposed to traditional finance.
- Transactions are sent from one address to another without any hassle in split seconds.
- The services in defi are available 24 hours a day, 7 days a week.
- It eliminates the days and time needed to approve or process transactions.
- There are no limits to the number of transactions you carry on your account.
- It can be accessed by anyone at any given point in time as long as you have access to an internet connection.
In conclusion, it is nice to note that DeFi as the name implies is unregulated. Therefore, there are possibilities of scams and mishaps like any other form of investment. Due diligence is highly advised when investing in or using any defi protocol or tool as nothing beats research! But just as Web 3 is the future of the internet, DeFi is the future of finance.
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