All you need to know about DeFi
What is DeFi?
DeFi, also known as decentralized finance, is the term for the next generation of digital finances and products that are built on blockchain technology. It is a revolutionary system that aims to take away the limitations that come with traditional finance, by removing inefficient gatekeepers and lowering costs with the help of smart contracts.
With DeFi we can perform most services that a bank can provide, like trading, lending and borrowing, purchasing insurance, earning interest, investing, and many more, with higher efficiency and at a cheaper rate. Take, for example, you would like to transfer money internationally from your country, and you head to the nearest bank. The delivery time could take as long as 5–7 business days and you would have to incur transfer fees, exchange rate fees, or even hidden costs. Now compared to Defi, transferring assets has never been easier where transactions could take seconds to move across the globe while incurring a significantly lower fee.
How did DeFi change the world and why did it become hype? (Advantages)
Defi caught the attention of people all around the world, as new opportunities present themselves. Individuals that do not pass stringent requirements to get a loan in the traditional system, can very well use defi as a tool for lending and borrowing. The limitless possibilities that Defi can bring as a financial tool ushered the world into a new era, providing new mechanisms to users, driving them towards financial freedom.
- Open and Transparent
As it is operating on the blockchain, all transactional activities are recorded on the system and open for public scrutiny. This would mean that users could improve on due diligence or avoid potential scams and unethical business practices. Additionally, it is based on open-sourced technology, making it accessible for governance or for contributors to make improvements to the community.
With cryptography and complex algorithms embedded in the blockchain. It is tamper-proof where transactions could not be manipulated by any member of the network. This provides security and assurance for data transmission and transactions.
- Transactional Speed
Regardless of where are you across the globe, you will be able to perform transactions in DeFi within seconds with an internet connection.
To understand DeFi, we must first look at the 5 pillars of DeFi and why each component is important.
What are the 5 pillars of DeFi (Stable coins, lending, and borrowing)
- Stable Coins
Stable coins are utility tokens where each coin is pegged to a real-world asset like gold or the USD. With the highly volatile nature of the crypto market, storing assets can be a feat, making it a trusted option to store assets on the blockchain.
- Lending and borrowing
Is one of the most important components of any financial system. It works exactly like traditional finance where individuals may acquire loans, however, without the need of a third party or stringent KYC.
- Decentralized Exchange (DEX)
A peer-to-peer marketplace that operates without a central body. It allows users to deal directly with each other across the world in a secure and trust-less manner, made possible by smart contracts.
While hackers or unforeseen losses happen in the crypto space so very often, insurance could be a great tool used by DeFi investors to mitigate risks.
- Margin Trading
Individuals may leverage borrowed assets to trade. This provides them with more capital to grow their positions, which could potentially multiply their portfolio.
As the saying goes, Rome wasn’t built in a day. DeFi is still in its early stages of development, with an explosive potential to change and improve existing systems. While we are currently in the talks for further innovations and improvements with DeFi 2.0, we can definitely anticipate seeing even more promising possibilities.