For a long time, we have gotten used to the idea that only cryptocurrency transactions can be decentralized. Decentralization is one of the major features that distinguish cryptocurrency from traditional currency. What if the concept of decentralization can be transported to finance as a whole. That’s a very big if, isn’t it? But we can tell you that there is potential in that thought and the world, whether it knows or not, is certainly moving towards it. Below, we examine this concept and you will also learn the necessary things about it.
What is Decentralized Finance?
This concept of financial decentralization, as noted above, is officially referred to as Decentralised Finance or DeFi. The idea, as hinted above, proposes a financial system that works independently of any central authority, much like cryptocurrency. The decentralized financial system would not need banks, insurance companies, or other financial intermediaries to work. This ambitious concept can apply to all aspects of finance like lending, trading, insurance, investment, wealth management e.t.c.
The underlying proposition of DeFi is that the financial system should run on decentralized applications, which would then be hosted on blockchain technology. DeFi proposes that the financial system should be managed based on peer to peer transactions through automated smart contracts, which would extinguish the need for any financial intermediaries with their attendant exorbitant cost of performing the role of an intermediary totally.
Why DeFi?
Yes, DeFi because the centralized system is a big lug of bureaucracy, and it is costly to the customer with it constant charges. Plus, there is inequity in the regular finance system as not everyone can access it. If that’s not enough, the traditional finance system has suffered one too many data compromise and a series of other kinds of security failure.
The traditional financial system is designed to make the customer bear the brunt of costs and losses. For instance, if a bank increases its operations costs, the customer would be made to pay for it. If the bank also suffers financial loss, the customer bears the loss. In DeFi, this is not possible as the blockchain is secure. DeFi, does not discriminate on who would access it, unlike the traditional financial system.
Now that you have sufficient knowledge about what DeFi is, here is a few things you need to know about this revolutionary concept.
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Where Did DeFi Come From?
Yes, you are right. DeFi is an Offspring of Bitcoin, but it began to be called DeFi in the 2020 summer. Bitcoin, the leading cryptocurrency, came about in 2009 and brought with it the idea of blockchain. Bitcoin trading uses the blockchain and it has grown to become a financial system that is valued above $800 billion. The bitcoin financial system is transacted on a peer-to-peer basis, and it preached financial transparency and freedom. Unlike banks that create the illusion of you being in control of your money, you are truly in control of your money with this new financial system.
So, Bitcoin brought about the idea and the impression that a financial system need not be centralized. The aforementioned has led to different persons thinking how the cryptocurrency financial system can be expanded to accommodate traditional financial system aspects.
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How can it be Accessed?
Interestingly, the Ethereum blockchain houses many DeFi applications and has the potential to decentralize many aspects of financial services and other kinds of services. The Ethereum blockchain is concerned attractive as it has a dedicated group of techies who are motivated to continue developing and maintaining the Ethereum blockchain.
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Different Applications of DeFi
The DeFi financial system can work for different financial and essay writer services. DeFi can incorporate lending, banking, insurance, payment, investment, wealth management e.t.c into its financial system.
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Benefits of DeFi
There are quite the benefits to DeFi. They are;
- DeFi cancels out the Inequities of the traditional financial system as everyone can access this financial service. Social status and economic status do not prevent people from taking advantage of this revolutionary financial system.
- Transaction within DeFi systems is faster and with fewer limitations peculiar to the regular financial system.
- There is little to no cost of a transaction when operating DeFi systems.
- DeFi in lending allows the lender to enjoy more humane loan conditions and rates.
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Why DeFi is Not so Popularly Used
As impressive as DeFi, there are key issues it had to resolve before DeFi can be used in a broader sense than just cryptocurrency. A few of these issues are;
- Reliance on Traditional Currencies.
For all the disdain DeFi shows a traditional financial system, DeFi needs traditional currencies to perform its functions. Traditional currencies have to be exchanged to cryptocurrency before DeFi transactions can take place.
- Not User Friendly Enough.
DeFi as global as it is has an interface that might be a chore for someone with less technical mind to operate.
- Irreversible Fraudulent Transaction
On the off chance that fraud occurs, such transactions cannot be reversed due to blockchains’ very nature.
- Loans Can Be Unfriendly
- The occurrence of Bugs in Smart Contracts.
The Future of DeFi.
The problems mentioned above constitute a massive block to the progress of a broader DeFi. This means that DeFi in a more general sense other than applying to cryptocurrency is more experimental than it is practical. To replace the traditional system so much disdains, Defi has to solve the problems facing it.
