29 June 2020
The fundamental purpose of any product or service built on blockchain is decentralization. That is, there should be no central authority managing the operations of the service. Many developments are being done in the blockchain space to create alternatives to many mainstream centralized services. DeFi is one such successful attempt.
DeFi stands for Decentralized Finance, and it is gaining a lot of attention in the world of blockchain and cryptocurrency. The intention behind the invention of this technology is to make the entire financial world decentralized.
In this article, we will help you understand the concept and purpose of DeFi in great detail.
The Purpose of DeFi
To comprehend the purpose of Decentralized Finance, we must know how traditional finance works and its potential flaws. The fiat currencies that we are currently using as a mode of exchange are heavily centralized. That is, multiple centralized authorities manage these currencies. Institutions like central banks and corresponding governments have total control over the demand and supply of these fiat currencies.
Centralized systems have failed in many instances because of the faulty decisions taken by the people in these institutions. The hyperinflation in Venezuela and the 2008 financial crisis are perfect examples. These issues could have been avoided had it not been for the ignorance and greed of those in power.
In many cases, we also let these central authorities take control of our assets while expecting some returns. That is, to save the money and gain some interest from it, we deposit them in banks in the form of fixed or recurring deposits. Due to this, we never truly own OUR money, and we never really get any of the returns or benefits from our investments.
The banks use these funds to invest in the global stock market and make huge returns out of it. Only a fraction of those returns are passed on to us, and they get to enjoy the rest. The interest rates are also being slashed as the global inflation rate is increasing with time. Also, we know the risks involved in stock trading and investing.
The need for decentralization has never been greater.
How Does DeFi Work?
Decentralized Finance is not a single product or service, but a combination of them. This list includes Smart Contracts, automated protocols, decentralized applications, and many more. Currently, Ethereum’s blockchain offers excellent flexibility for companies to build their DeFi applications. However, various other platforms offer these services as well.
Simply put, DeFi is an open, decentralized, and transparent financial ecosystem. Here, we can build an endless number of applications blockchain and integrate them to form a decentralized network. The primary motto of DeFi is to offer you complete control of your assets. This is only possible because of blockchain technology.
Exciting developments are happening in this space, as fin-tech companies are innovating open-source protocols to enable the trading of these assets through decentralized exchanges.
Hence, traders and investors can the actual returns and control of their assets, as there are no intermediaries involved. It is crucial to know that this is an ever-growing network since it is public and open-source. So, developers and blockchain technologists worldwide can collaborate and build exciting new protocols and platforms to keep the system regularly updated.
Reasons That Make DeFi Interesting
- While the traditional financial system is extremely centralized, DeFi works almost autonomously. The rules of the transaction are embedded in a Smart Contract as code. It automatically gets executed once all the conditions of the transactions are met.
- High transparency is achieved as the smart contract code is available for anyone to check, understand, and verify. All the details of the transaction are clearly mentioned in the Smart Contract, which builds a significant amount of trust between parties.
- The contents in the contract are public for anyone to view, which may raise some privacy concerns. However, the identity linked to that contract and transaction is anonymous. That is, the real identity of the person won’t be revealed unless they wish it to be.
- DeFi applications offer a lot of flexibility and customization, as many dApps (Decentralized Apps) can be integrated to make decentralized financial transactions more convenient.
Kyber Network, Uniswap, OpenSea, MarkerDAO, and Compound are some of the most popular DeFi applications prevailing in the market.
This is an ever-expanding aspect of Crypto, and it is increasingly exciting as new innovations are made every single day. It is definitely a sector of Crypto that should be on your radar.