INTRODUCTION TO DEFI
Decentralized finance (DEFI) has become a buzzword that has introduced a formidable change in the approach about financial transactions. This article is a definitive guide to understanding everything about Decentralized finance (DEFI).
What is DEFI?
DEFI is an expansive financial ecosystem that strives to take out the middleman and allowing financial transaction between users.
In simple words, it stands for self custody finance. Unlike traditional finance where a company, bank, fund is responsible for your money. In DEFI, no one but you has access DEFI to it.
DEFI majorly takes out the middleman in financial transactions. so instead of having your bank or credit card issuer be the intermediary between you and merchant when you make a purchase, you use the digital currency and have ownership of it to use directly. DEFI is primarily based on Ethereum.
BRIEF HISTORY OF DEFI
It is argued that DEFI started in 2009 with the launch of Bitcoin, the first p2p digital asset built on Blockchain network. Bitcoin made it possible to envision a transformation in the traditional financial world. The summer in 2020 was another crucial point in the history of DEFI. It was the starting point for the development of modern DEFI market as the pandemic raged across the globe and the traditional financial system buckled under it’s oppression. DEFI application like lending, borrowing, market making, yield farming, insurance, and other many instruments that are usually only offered by traditional finance were developed during lockdown, giving a sigh of reprieve for the millions who had lost their jobs.
Well, lets dive into its applications;
- LENDING AND BORROWING
Users can borrow a crypto asset by providing another one as a collateral, in other words DEFI protocols helps in making lending and borrowing process transparent and easy.
2. DERIVATIVES
Derivatives can range from asset backed tokens to decentralized oracles or p2p protocols for prediction market.
3. DECENTRALIZED EXCHANGES
Decentralized exchanges are crypto exchanges that facilitates direct peer to peer transactions in a secure way and restrict the need for an intermediary.
ADVANTAGES OF DEFI.
- DEFI OFFERS EASY ENTRY TO FINANCIAL MARKET .
DEFI offers investors and traders a better, easier, and more productive method of making financial transfer’s.
2. DEFI PUSHES UP CRYPTO PRICES
Since DEFI advent , the market capitalization of the segment’s major project has increased significantly. prices of some hype coins doubled in price in less than a year.
3. DEFI FACILITATES TRANSPARENCY
DEFI protocols offers greater transparency than traditional financial institution can provide. DEFI protocols is created on the Blockchain, which makes transactions immutable, and ensuring transparency.
PROBLEMS AND RISK OF DEFI
Meanwhile, the DEFI ecosystem also have several disadvantages that cannot be ignored.
- THIRD PARTY AUDIT IS NEEDED.
DEFI is based on smart contract that could be sensitive to manipulations and exploit. Therefore, audit of smart contract is needed for all DEFI protocols.
2. CENTRALIZED DATA FEED
Blockchain cannot access off chain information, so there is a need for a third party to supply a real world data to the Blockchain , which makes data centralized and vulnerable to issues related to centralization.
3. HACKS AND OTHER EXPLOIT ATTACKS
DEFI projects are vulnerable to hacks and other types of exploit attacks due to misuse of third party protocols, business errors, coding errors, flash loans and price manipulations.
WHAT DOES THE FUTURE OF DEFI HOLDS ?
Apparently, some people are majorly concerned about what DEFI would look like in the future.
Unlike traditional financial institutions, DEFI also allows you to remain in custody to your financial assets. This is a very modern and decentralized way of doing things.
DEFI technology is the future since it brings solutions to traditional problems.
On a final note, you can notice that decentralized finance is the next big thing in revolutionizing financial system. learners have the opportunity of uncovering an array of information that showcases it’s importance in the existing financial landscape. DEFI also presents reliable prospect for the digital transformation of financial systems and improving access to financial instruments with ease.
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