What Is Defi?
Money has been a significant catalyst to the progress of human civilization since its inception. The act of trading goods and services in exchange for currency has helped to build nations. In smaller transactions, money has played a crucial role as a symbol of trust between two parties. This age-old ritual is so ingrained in our global society it’s hard to think about a world without money.
The volatility of centralized banking institutions has started to build mistrust and displeasure on the part of consumers in recent years. It has led to the popularity of cryptocurrencies as a formidable opponent to the traditional forms of banking. That has made way for a new type of banking system known as Defi, but what is Defi?
In its most basic terms, Defi is the abbreviation for Decentralized Finance. As our current centralized banking systems seem to only help the bank, many customers are intrigued about the opportunities that a decentralized system can offer.
What Is the Definition of Defi or Decentralized Finance?
As stated before, the abbreviation “Defi” stands for decentralized finance. In essence, Defi is a variety of financial applications which leverage blockchain networks and technologies. This system of banking has become a formidable opponent of our traditionally closed or centralized system.
Defi has the potential to shift the attention towards an economy with improved transparency. In this open economy, financial protocols would depend on three elements: interoperability, programmability, and ease of composing. Decentralized finance is the catalyst for the new Open Finance Movement.
In the Open Finance Movement, customers stand to gain significant control over financial services pertaining to savings, lending, trading, insurance, and more. Defi applications have the potential to surpass our current conventional banking system. Defi offers increased accessibility to individual users with two-core dependency.
Two-core dependency means the ability to access internet connectivity and availability to access a service through a device like a computer, smartphone, or tablet. The most significant factor to the true potential of DeFi is the possibility of using smart contracts as a disintermediation tool for financial transactions.
What Is the Purpose of Decentralized Finance
When we look at the state of our current centralized banking system, it’s not hard to imagine why people are encouraged to try something new. Our current centralized system is dependent on governments and banks to act in everyone’s vested interest. However, that is never a guarantee.
Our continued dependency on centralized banking implies higher forms of risk due to the single point of failure. Additionally, there are many questions about decisions from centralized entities to print money, which directly affects inflation and other economic factors. To this end, it’s become more important to think about possible alternatives to a centralized banking system with a vested interest in every individual.
Why Has Decentralized Finance Become More Popular?
Within the past 50 years, the fluctuation of the dollar has become a bit problematic. The inflation of value in currency has led to the phenomenon of spending more on a product in 2021 than you would have paid in previous years. Putting the concepts of supply and demand aside, this shows the value of the dollar in decline. Meanwhile, the average American’s pay has been stagnant for the past 30 years, adding a pressure cooker effect to families, as money doesn’t go as far as it used to in previous decades.
An excellent example of this is Venezuela. Following a set of notoriously bad monetary policies and their impact on Venezuelan citizens dealing with sky-high inflation, it calls into question the validity of the government’s role in centralized banking. When the government decided to print more money in the event of a drop in oil prices, it created a 1,000,000% inflation rate creating a massive imbalance in the Venezuelan economy.
Banks also share some of the blame. A bank provides a fixed interest rate on savings; however, they use that same money to lend to others at a higher interest rate. That means banks are receiving the benefit of a customer’s savings account at the customer’s expense. No matter how much the bank earns from your savings, you still receive a tiny bit of interest.
With annual interest rates set around 2%, customers are not getting a good return on depositing their money in banks. However, Defi offers alternatives for customers to have control over the diversification of their investments.
The Case for Decentralized Finance
Hopefully, it’s clearer to see why decentralized finance has become a more popular option given the deficiencies in the current centralized system mentioned above. It takes away the need for centralized entities to control financial systems and provides opportunities for individuals that the current system does not offer.
Here are some common uses for decentralized finance:
- Open Lending Platforms — a few of the advantages of open lending protocols are collateralization of digital assets, standardization, no credit checks, and instant transaction settlements.
- Decentralized Exchanges — DEX platforms use smart contracts to automate trades and other trading tasks, reducing costs. An example of this is GoSwap.
- Stablecoins — The use of stable coins could speed up efficiency and reduce costs in areas of insurance and mortgages through smart contracts.
What Are the Advantages of Decentralized Finance?
Based on the information stated above, it may be clear to see some of the advantages of a decentralized financial system. Here are a few of the popular reasons:
- No need for permissions
- More earning opportunities
- Don’t have to depend on banks
- Greater opportunity for innovation
- Customers have greater control over how they use their money
The notions of decentralized finance are less of a wish than a foregone conclusion. The future of banking is here.
Ethereum Has Record-Breaking Transaction Fees
Recently the popularity of Ethereum Defi coins has exploded. As a result, Ethereum transaction fees have hit an all-time high. People are waking up to the potential of decentralized finance and want in. At the time of this writing, Ethereum transaction fees are over $20 for the first time. Will high transaction fees deter would-be investors? Maybe not.
Consider this, if those same transactions were deployed on GoChain, they would cost less than a penny. Clearly, there is still room to improve, but the new banking revolution is here.
Keep Following the Important Trend of Defi
We hope this article has helped you understand a little better the complexities of decentralized finance. Keep following this developing trend in the banking world. It is sure to change the way civilizations buy and sell services.
Learn more about GoChain at https://gochain.io