DeFi and Its Viable Importance

• DeFi is capable of replacing banks and brokerages.
• Dapps can affect your investment.
• DeFi too faces hacks and mishaps.

DeFi, or Decentralized Finance, is a collective term for several financial goods and services that are accessible to all on a decentralized public blockchain network, mainly Ethereum. Since it is accessible to all, it eliminates the interference of any third-party organizations such as brokerages or banks, the transactions or deals directly take place between the two involved individuals. There is no involvement of any centralized authority capable of denying one’s access or blocking any payment or transaction. DeFi supports almost everything a bank does, such as lending a loan, borrowing a loan, earning interest, trading assets and even purchasing insurance. Only DeFi, serves all these services quite faster, efficiently, eliminating third parties and no paperwork as well.

The idea of DeFi was first proposed in Bitcoin’s whitepaper which was published in 2008 and mentioned the structure of an ideal system for digital currency. The introduction of DeFi has resulted in the financial markets showing more transparency, creating more opportunities, and becoming more fair & open to all.

– Advertisement –

Dapps, or Decentralized Apps, are software that functions on the Ethereum blockchain and are utilized by users to enjoy DeFi. Using DeFi via Dapps, one can lend their crypto to other users, and for doing so, the user receives interests and rewards, not just monthly but every minute. One can get a loan or borrow crypto from other users, or even flash loans which are for a very short period and can be acquired with zero paperwork. One can also trade cryptos directly with other users, and no brokers in between. One can even invest in assets by betting on them for short or long periods and earn interest simply by putting crypto in savings accounts. 

ALSO READ – A GLIMPSE AT NFTS AND THEIR FUTURE

Another great use case for DeFi is DAO, Decentralized Autonomous Organization. In traditional financial entities, the centralized financial authorities play a crucial role by handling quite important operations such as applying governance, gathering funds, etc. The DAOs were introduced to serve the same goals for the DeFi. Also, a unique use case of DeFi, is the creation of tokenized derivatives by the use of smart contracts. At its basic, deciding the value of a contract based on an asset or a group of assets is what tokenizing a derivative refers to.

Some of the downsides faced by DeFi include inconsistent rates of transaction over Ethereum blockchain resulting in an increased expense of trading, you maintain your own records for tax, your funds or investment facing high volatility depending on the Dapps you use, etc.

Even though DeFi is in its early stages of development, the total worth of DeFi contracts that have been locked in has been estimated at over $41 billion. The DeFi is no exception and has faced hacks and mishaps on its journey. Smart contracts can be an area of concern as they are pieces of code that can fail or stop working at any point of time due to numerous factors. Overall, DeFi could be the future but surely needs development and more stability with increased security solutions.