DeFi is an acronym of Decentralized Finance that is basically a financial structure or an ecosystem of financial applications that built using blockchain networks which translates an existing financial structure by porting them onto the blockchain.
loans, savings, insurance, mortgages, etc.
Decentralized finance (DeFi) is an aim to create a transparent, opensource, and permissionless financial system so that it is available to everyone.
Users like you and me have full control over our assets and there is no third regulatory body or central authority, its a peer-to-peer decentralized application.
Advantages of DeFi?
In today’s traditional financing there are institutions that govern the financing such as banks and laws for arbitration of our finances.
Whereas DeFi has no intermediaries and governing bodies for arbitration.
DeFi applications reduce the cost of the overall operations associated with providing and use of these products for smooth user experience.
Smart contracts are used to settle/resolve all disputes of any kind and users have control of their assets all the time.
As the blockchain technology is distributed and not contained in a single spot, failure or any kind and errors
Deployment is much less complicated and more secure as DeFi applications and frameworks are built-in advance
The financial services to the low-income group of people are absent as the intermediaries and financial systems make a profit out of their services, However, with DeFi the cost of operation is significantly reduced, and being open-source the ease of access for individuals who otherwise wouldn’t have access to any financial services is highly increasing.
Use Cases of DeFi
Currently, the three major use cases of DeFi are
Creating monetary and banking services: Example Stable Coins
Peer-to-peer, pool lending, and borrowing platforms
Enabling advanced financial instruments such as DEX, tokenization platforms, derivatives, and predictions markets
Role of smart contracts in DeFi
Smart Contracts play a major role in Defi. Usual contracts use legal terms and relationships between the entities.
Disadvantages of DeFi
Poor performance: Slower than their counterparts i.e centralized applications because blockchains are relatively slower
Bad User Experience: Current DeFi applications lack a polished user-interface and require extra efforts from the user’s part.
High risk of user errors: DeFi removes the intermediaries from the equation transferring the responsibilities of the intermediaries to the users which make room for user errors in an immutable blockchain structure
Decentralized applications are focused on building open-source and decentralized financial services that is free of any intermediaries such as banks and any other political systems. This allows for more openness in the financial system.
While being a tempting idea, decentralizing has its own fair share of problems with it such as finding use cases that are suitable for characteristics of blockchain is useful for building open financial products.