Decentralised finance refers to a growing financial ecosystem made up of interconnected computer programs that allow individuals and institutions to transfer money and purchase financial assets from one another, without relying on third-party brokers or intermediaries. In doing so, it can dramatically reduce transaction costs, make trading more equitable and open, and create new efficiencies.
Current financial systems are highly centralised, depend on trust in institutions that often have little or no accountability, and are therefore prone to error and corruptibility.
What is DeFi?
Decentralized Finance or DeFi allows us to bypass the middlemen and trade or have access to finance directly from each other without need of intermediaries. We can secure assets using protocols so as to be able to trade with one another directly, for a minuscule fee. DeFi is tagged with the ‘peer-to-peer financial transaction with minuscule fees’ acronym described above. If you need to know about DeFi as an investment vehicle, endeavour to do proper research first as everyone may not be able to take advantage of it, because it’s still a relatively young technology.
DeFi, or decentralised finance, runs ‘smart’ contracts on blockchains such as Ethereum to complete transactions automatically upon fulfillment of certain conditions. It involves no centralised exchanges, and carries virtually no risks of hacking or fraud, and the codes of the transactions are made public, ensuring that deposits are invested exactly as intended. If this becomes popular, we might even have better banking and investment – anywhere in the world.
DeFi is a blockchain-based financial system
DeFi is a technology inspired by blockchain that allows individuals to conduct various financial transactions without the usual market participants such as banks. DeFi enables users to lend, save and trade crypto assets on these platforms, which are run on digital contracts that depend on a predetermined set of conditions to execute automatically; all on top of public blockchains such as Ethereum infrastructure.
DApps – meaning ‘decentralised applications’ – allow users to access them by employing a wallet and an internet connection. These are much like normal software on your smartphone or computer, except they are using blockchain technology instead to function.
By embracing these technologies, you benefit from reduced fees and higher interest rates than what most financial institutions would offer, but they come with a degree of risk.
DeFi offers financial instruments
DeFi is the collective name for a blockchain-based financial ecosystem that allows for faster, cheaper, more democratic investment via investments, prediction markets and p2p lending.
It’s no surprise then that such instruments are soaring in popularity, since they cut out middlemen, outpace traditional financial instruments, work in every corner of the world, and can be scaled massively.
However, despite the potential of DeFi, some of the issues which hinder its proper development should have been considerd by investors who are willing to buy into DeFi. The programming of DeFi is not as secure as it should be; this, inevitably, make it vulnerable to hacking. Investors and users should know these problems before they come in.
It may seem daunting at first, but it turns out that getting started on DeFi isn’t so hard after all. Like many other things, DeFi can be made secure and easier to use with the help of some well-made software. Companies like Paystand provide more secure wallets that make DeFi easier for people to handle; this includes reduced transaction fees and programmable money.
DeFi offers lending services
Decentralised finance allows people to transact money to and from each other anywhere in the world also, as well as lend and borrow crypto assets peer-to-peer – all without banks and traditional financial institutions. With a decentralised model, we get rid of the middleman and those who supervise it all: the central authority. What we do get is a more efficient transfer of value without the hefty fees that come from using underwriters or KYC rules.
What makes DeFi is the players in a very different way to traditional finance. Instead, financial applications are built on top of blockchain networks where anyone can participate. These applications, so-called decentralised applications (dApps), enable users to use financial protocols in ways that are quick, secure, democratically oriented and aren’t saddled with the same serious issues of scalability and security plaguing traditional finance – plus, anyone can participate because the apps are open source so that anyone can look under the hood. Anyone can build on top of the network, and anyone can use the apps. And critically, DeFi extends financial services to those people who don’t have enough money to get an account at an existing bank, or who need a loan but banks have refused.
DeFi is unregulated
Since there is no central authority to monitor, collect or even pause the flow of information, DeFi is highly unregulated – and that opens up major risks to investors and markets, as well as to national economies. In fact, DeFi ecosystems might end up merging with traditional financial systems, which could compound systemic risk even more.
DeFi leverages blockchain technology to cut out middlemen from payment and investment transactions, thus significantly lowering the transaction costs incurred, and enables access to capital. Examples include lending, payments, and investing.
DeFi transacts on the blockchain through smart contracts, largely on the Ethereum chain. A smart contract is an executable code that auto-executes under pre-specified conditions; its code gets written in Ethereum’s programming language to ensure maximum programmability and versatility to divergent use cases.
