Decentralized Finance
Why is it significant?
Decentralized finance, sometimes abbreviated as DeFi, is the concept of financial transactions taking place on decentralized networks. DeFi is a peer-to-peer decentralized finance infrastructure. In short, DeFi is “lending, borrowing, and trading on an open, permissionless, blockchain-based network.” Defi is a highly flexible infrastructure to support a wide range of financial products, services, and third-party innovation.Defi allows for transactions to be conducted with cryptocurrencies.
“ Its core includes a peer to peer trading platform, an asset-backed lending model, a derivative trading model, and a digital exchange.”
In this article, we give you a high-level overview of decentralized finance and focus on what it is, why it was needed, and how it can benefit you. DeFi combines the best features of alternative finance with the security of blockchain technology.
Since the financial crisis, there has been a serious movement towards a direction of a decentralized economy. This is mainly to avoid an individual’s money going into a black hole or going to unethical practices. There are significant challenges existing in the traditional financial system, including opaque and inaccessible markets, a lack of transparency and information sharing among market participants, and a large number of intermediaries.
The decentralized movement is growing, and it’s being led by the world’s top entrepreneurs, inventors, investors, and thinkers. This new technology will add transparency and speed in the financial market while cutting out middlemen who add no value to the system.
The term decentralized finance has come to the fore as a response to the maturity of blockchain technology. Decentralized (or de-centralized) finance (DeFi) refers to apps or platforms that use blockchain technology and smart contracts to facilitate borrowing and lending of money.
Decentralized finance is indeed a type of decentralized economy. An economy doesn’t necessarily have to rely on economic freedom — monopolies are examples of non-decentralized economies — but it’s impossible to achieve because the power has already been consolidated into the hands of a single entity, government. A decentralized system does not have to have a single authority. Instead, there can be many different authorities, and no single authority is in charge. And in principle, a decentralized system can function without authority.
Decentralized finance (DeFi) is disrupting the global financial system. It provides a set of protocols for programmatically building financial applications and integrating them into other services. While DeFi is just starting to gain traction, it’s also still confusing for many people.
What separates DeFi from traditional financial institutions is the absence of intermediaries and third parties such as banks and financial brokers. Instead of using these middlemen, DeFi relies on so-called “smart contracts” and public blockchains such as Bitcoin or Ethereum.
The Open Platform for Decentralized Finance (OPD) is an open-source initiative that enables the creation of decentralized crypto-financial applications on the Ethereum blockchain. Ethereum is a decentralized platform that runs smart contracts, which are programs that run exactly as programmed without any possibility of downtime, censorship, fraud, or third-party interference.
This term is used to describe software best suited for executing interbank operations which have been traditionally reserved for institutions within the financial industry. These programs enable peer-to-peer lending and borrowing where the financial institutions themselves are eliminated from the process.
Decentralized finances are safer and less expensive than centralized finances. It increases financial access, lowers the cost of financial transactions, and strengthens financial networks. It lets people in developing countries, or countries with corrupt financial systems, make use of financial services. And it lets people interact directly, without middlemen, in financial transactions.
The idea is to have a financial system that relies either on central authority nor trusted third parties to process its transactions. With the widespread adoption of blockchain technology, decentralized finance is being integrated into innovative financial products.
In conclusion, the idea behind DeFi is to take the power away from big banks and governments and put it back into the hands of regular people. So far the majority of our financial systems are still based on centralized concepts. DeFi will change and will become a tool used by investors, developers, and companies across the financial spectrum!
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