DeFi Abstract- the New Financial Ecosystem

We are currently living in a world of transformations. As technology is evolving, its convergence with different sectors has opened up immense opportunities. Similarly, in the financial sector, Decentralized finance is gaining significance. 

Let us understand it with an example! We are living in the world of the traditional financial system. Banks and financial institutions are governing the flow of money. This means that there is constant monitoring of our finances by a central ruling body. Futurists have realised the need for an open, transparent and secure financial segment. These specifications became the driving forces for the birth of Decentralized Finance. The simplest way to explain DeFi would be to call it an open financial sector which runs on a blockchain system. 

DeFi has become a revolutionary alternative to the centrally-governed institutions which have been acting as financial intermediaries for ages. 

In this lesson, we will soak up the DeFi story! From its inception to the present-day scenario, we will go through the bits step by step. Keep following!

1. What is DeFi?

Decentralised finance or DeFi is a piece of code which eliminates middlemen or financial institutions by allowing individuals to perform financial transactions by using developing technologies. It is an emerging technology which works based on secured distributed ledgers similar to those used by cryptocurrencies. DeFi excludes the middlemen by allowing people or businesses to control financial transactions through peer-to-peer networks, security protocols, connectivity, software and hardware enhancements.

DeFi has empowered individuals with peer-to-peer digital exchanges by removing third parties from taking their share in the middle of the transactions. Individuals can hold money in a secure digital wallet and use it through transfers done in minutes. However, DeFi does not provide full anonymity. Though the transactions don’t include the individual’s name, they are traceable by entities which have access. This is done to enforce the individual’s financial interests and safety! Best part is that anyone can use DeFi from anywhere! Isn’t it so fascinating? Let us know more about it. 

1.1 How does it work?

As we know by now, Decentralized Finance works on blockchain technology! Applications called dApps handle the transactions and run the blockchain in the case of DeFi. 

• It is very simple to understand that the transactions are recorded in blocks of a blockchain.
• They are verified by other users. 
• If the verifiers agree, the block is closed and encrypted.

• Then, another block is created with the information about the previous block within it. 
• These blocks are chained together, giving it the name of “blockchain technology”
• The information on these blocks cannot be altered! Thus, it is one of the safest mediums used by the New-Gen financial scheme. 

DeFi has become an amazing alternative to traditional finance and overcomes many barriers faced by the older systems. Do you wish to know how?

2. DeFi Vs. Traditional Finance

DeFi differs from traditional or centralized finance in many ways!

In a Centralized system, the money is under the control of central bodies like banks and third parties who facilitate the transactions. 

• These players charge a fee for providing their services. It starts from the merchant and ends at the bank. 
• At each step, the credit charge is taken by the merchant, the acquiring bank, the credit card network and the bank! Isn’t it too heavy? 
• Every transaction is looked after by the central financial system. Whether a loan application or a local bank’s service, all activities are monitored.

As we know by now, in the case of Decentralized finance, there is no middle party. Everything is handled directly between the users. Thus, saving on that extra amount spent on the service fee! So which one would you choose for yourself?

3. The Future of DeFi

Like everything around us, DeFi is also upgrading! With seamless peer-to-peer transactions, DeFi has presented endless opportunities for financial operations all over the world. The future of DeFi is filled with unimaginable horizons! 

• The security and transparency have ensured the long-term usage of this technology for managing financial routes
• Loans and other tools could be easily accessed and processed using DeFi due to no third-party involvement
• With Web 3.0’s advent of hi-tech simulation in the financial sector, DeFi is going to be a game changer shortly
• Due to the absence of adversity or bankruptcy in the DeFi platforms owing to the absence of any centralized financial institution, the future of DeFi seems to be shining brighter with days!

DeFi supremacy is going to be the next in our 2020’s decade! Let us know how.

4. The DeFi Supremacy

As we turn over the DeFi pages, we get to know how it has added wonders to the financial world. Let us clear all your doubts! DeFi has helped us in many ways!

   4.1. Pros and Cons:

• The Decentralized Apps allow individuals to transfer capital around the world without any glitch
• It creates opportunities for investors to generate income
• With a high level of security, it curates easy ways to trade cryptocurrency
• Due to no third-party involvement, it is cost-effective and time-saving

However, every magic tool comes with its share of cons! As we know the nature of the crypto world, there are high levels of volatility. Also, due to less awareness of the overall usage of the DeFi system, risks of fraud and scams could be there. With time and consciousness, DeFi could overcome these minor loopholes. We are positive about the dominance of DeFi supremacy over the upcoming years!

  4.2. Use Cases of DeFi

By now we have understood the massive strength of the DeFi system in the financial world! Let us have a look at some of the examples where DeFi is playing a major role: 

P2P transactions: 

Peer-to-peer transaction is one of the core functions of DeFi due to no involvement of a third party! P2P can also look after an individual’s loan needs. Payments via P2P are made through the decentralized application or dApp following the blockchain process. 

Smart contracts: 

The use of smart contract technology exploded in 2020 as the DeFi evolved. Cryptocurrencies and dApps function using the smart contract code to facilitate the exchange of funds. To ensure that each transaction is authentic, dApps use Smart contracts for making it secure. To Make it more clear, smart contracts are used to make sure that party A and party B are fulfilling their end of the agreement! Also, smart contracts make the process faster, transparent, accurate and secure. As the name suggests, smart contracts are automatic and self-executing agreements which operate without the need for third-party validation! They remove nuances of unnecessary paperwork by excluding expensive intermediaries used to undergo traditional contracts! 

   4.3. Popular DeFi projects

We have highlighted the leading DeFi projects of the current scenario for your better understanding. 

1. Ethereum: the best overall DeFi investment for 2023 owing to its blockchain platform built on DeFi protocols.

2. Uniswap: The largest DeFi exchange available on Ethereum, Polygon and other Layer 2 networks

You can read about them in detail here: Read about the DeFi projects here!

5. The DeFi Challenges

After reading about the advantages DeFi has fostered in,  there are some common sets of challenges which might be a part of a DeFi project: 

• Lack of regulation might lead to exploits and hacks, therefore, the project needs to be looked after by a professional only.
• Less awareness of the topic might lead to errors! 

However, code audits, decentralization regulation, awareness and education might remove these boulders easily!

6. Closing Thoughts

Decentralized Finance or DeFi is a transpiring financial technology which challenges the traditional banking system. It is efficient as it eliminates hefty fees and promotes seamless peer-to-peer transactions! 

By incorporating DeFi protocols, many projects have attained success and popularity among traders. It is a boon to the cryptocurrency world with an expanse of worthwhile opportunities to dive in!

7. FAQs