What is Defi? Is it really a future of finance?

Cryptocurrencies are designed to give more control to the people using them and less control to governments and authorities.

One of those methods is DeFi which stands for Decentralized Finance. DeFi to according the crypto community is something that can change the financial system

In this article, I’m going to decode DeFi, and what is the potential of Decentralized finance

What is DeFi?

In order to understand DeFi we first need to understand some basic concepts about our present financial system.

The current financial system which we all use for banking, lending & trading is managed by a centralized system.

These systems are operated by governments & authorized intermediaries like banks. We need to use a bank to get access to loans, deposit your money or transfer money to someone else

These gatekeepers then charge a commission from us to manage all of our financial operations.

In contrast, decentralized finance, a.k.a. DeFi uses blockchain & cryptocurrencies to manage all financial transactions. It allows us to perform all kinds of financial transaction without an intermediary body, saving us from all those hefty and complex commissions.

Unlike our traditional system where we have to meet certain criteria to be eligible to perform financial transactions, DeFi allows everyone to perform financial transactions.

What can you do with DeFi?

DeFi can perform all simple and complex operations of the traditional financial system. You can perform the operation by using decentralized apps called ‘dapps’ short for ‘decentralized apps’ or programs called ‘protocols’.

Ethereum is mostly used by these dapps and protocols because it’s easily adaptable and has a very strong community as compared to its peers.

Here are some ways in which dapps and protocols are being used today:

1. Daily financial transactions

You can use DeFi to conduct all your daily transaction like payments, trading, buying insurance, lending & borrowing globally.

2. Decentralized Exchanges(DEXs)

Until now, people have been using centralized crypto exchanges like Coinbase, Binance, etc., which for the most part works similar to trading apps.

DEXs, however, allows peer to peer trading which means you don’t need a 3rd party to carry the transaction. You can directly exchange tokens or crypto with someone who is willing to sell.

3. E-wallets

E-wallets generally require you to do KYC in order to use them and are controlled by centralized entities. DeFi wallets are more like the physical wallet you carry in your pocket. You can access these wallets through a private key.

Unlike normal wallets, DeFi wallets are flexible which means you can connect them with most of the services out there, like centralized crypto exchanges, NFT platforms, etc.

4. Stable Coins

Stable coins are cryptocurrencies that are tied with stable assets like the US dollar, gold, etc that we all are using on a day to day basis that remain stable for a long time.

Cryptocurrencies are highly volatile in nature and can fluctuate wildly, making them hard to be used on a day to day basis. Stable coins can remedy this since, for the most part, Fiats remain stable for a long time.

5. Yield Farming

When you deposit money in the bank, you are essentially giving the banks a loan on which you earn interest. Yield farming also works in a similar way. You lend crypto to a dapp and it gives you interest on the lending amount.

Yield farming is considered as rocket fuel by many experts (?) as you can reap big rewards on the crypto that you lend.

6. Non Fungible Tokens

2021 saw NFTs becoming a buzzword in the crypto-world. It allows you to create tradable digital assets out of non-tradable assets. These non-tradable assets can be anything from the first tweet on Twitter to a widely circulated meme!

Benefits and Risks of DeFi

Even though DeFi is a very new concept, people all around the globe have started using it. There are varied benefits to DeFi-

• Markets are open 24x7 and no centralized authority monitors or block payments. The whole system is run on codes and can be run with little to no human interruption.
• It gives exposure to the global markets & decreases dependency on local currency & banking option. All you truly need with DeFi is cryptocurrency and the internet!
• The code is transparent on the blockchain. What this means is that available publicly for anyone to audit. For privacy concerns, transactions are pseudonymous by default
• Anyone can create or use it. Unlike traditional apps, there’s no centralized authority acting as a gatekeeper. Everyone is free to use it
• New apps can be created by combining existing apps. Because the code is open source you can create new products combining the existing ones

Yeah, I get it, you must be thinking if everything’s so great why are not using it already. Well, there are some areas of concern also involved:

• Irreversible, incorrect transactions or errors cannot always be corrected. DeFi works on blockchain and once a block is created it is not possible to make changes in it. So if there’s any coding error it can lead to drastic circumstances.
• In 2020, one platform known as Yam Finance quickly grew its deposits to $750 million before crashing days after launch due to a code error
• The code for the smart contracts that implement DeFi platforms is generally open-source software that can be easily copied to set up competing platforms, which creates instabilities as funds shift from platform to platform
• The person or entity behind a DeFi protocol may be unknown and may disappear with investors’ money.
• Inexperienced investors are at particular risk of losing money using DeFi platforms due to the sophistication required to interact with such platforms and the lack of an intermediary with a customer support department
• You must secure the wallets you used to store crypto. Wallets are kept safe using private keys, if you lose them you can lose access to the funds as there’s no way to recover

Conclusion

Decentralized finance is truly a way to give power in the hands of people, where everyone is equally treated, unlike centralized finance where the power lies in the hands of Governments and centralized entities. It gives you the power to transact globally. But that being said it is really hard for newcomers to understand it properly as it is in its early stages of development.

So be cautious while using DeFi or crypto in general.

Let me know in the comments what do you think about DeFi. I would love to hear your thoughts😃