Defi ecosystem: Reasons why it might be the future of “Finance”.
Years back people traded goods and services for other goods and services.
But, as humans evolved, the economy evolved.
currency was invented to make it easier to exchange goods and services.
Subsequently, coins helped usher in innovations and created better levels of the economy.
Centralized Finance CeFi
Today, almost all of our financial systems and the services they provide run on centralized networking.
Examples of these centralized systems include banks, the stock exchange, insurance companies, and other financial institutions.
These financial institutions have someone or an organization in charge/control of how these services are delivered.
And these centralized entities bring with them several risks/flaws, such as mismanagement, fraud, and corruption, to name a few.
Traditional/centralized financial services such as payments, loans, and borrowing were only available through existing financial systems and banks before Defi.
However, things changed with the inception of blockchain technology.
Historically, the central government has produced currencies that support our economy, giving them increasing authority as more people come to trust them.
However, we see an occasional breach in confidence that has led many to question the centralized authority’s competence in handling our money.
Fortunately, Decentralized finance (DeFi) developed a financial system that is accessible to everyone and reduces the need to trust and rely on a central authority.
Understanding Decentralized Finance (DeFi) and its Ecosystem.
Before DeFi, people were compelled to trust centralized bodies like the bank to keep our money, execute transactions, and so on.
Now we have to trust that these centralized bodies will not in any way act in an unjust/biased way. DeFi has created a decentralized world on the blockchain that keeps you incharge of your finance, anytime, anywhere in the world.
what is DeFi?
Decentralized finance is an umbrella name for a multitude of public blockchain apps and initiatives that aims to eliminate the traditional/centralized financial industry.
DeFi is a financial application built on blockchain technology that uses smart contracts to execute transactions.
It provides a unique experience compared to traditional banking and opens up a world of opportunities/possibilities for users.
This fantastic system developed a financial system that is accessible to anyone and reduces the need to trust and rely on a single authority.
Why use DeFi?
1. Permissionless
Users do not require permission to use DeFi because it operates on public blockchains, and public blockchains are permissionless blockchains.
Unlike centralized finance, where consumers must undergo a KYC procedure to use specific services, which may include disclosing personal information.
Developers who want to build on permissionless blockchains may do so freely, making it extremely accessible.
2. Trustless
One big advantage of using DeFi services is that they are completely trustworthy.
Its users ensure that DeFi services work as expected by inspecting their code as it’s transparent because they are governed by smart contracts (lines of codes), making them more reliable than human beings.
Here you are not compelled to trust an intermediary (centralized body) because you’re solely responsible/in charge of your finance.
These actions are programmable and are executed on the Blockchain using smart contracts.
3. Transparent
DeFi offers transparency. As it functions on blockchain technology, all transactions, data, and codes on the blockchain are transparent to everyone.
With DeFi you can track and carry out transactions transparently on the blockchain.
Public blockchains are entirely open-source software, i.e. anyone and everyone can view its code and fork it.
Also when transactions are carried out it uses the DTL Distributed ledger technology to display the executed transactions to both parties.
This means that nothing is controlled by a single source, It’s all decentralized.
4. Speed
With DeFi, you can do most of the things that banks support like earn interest, lend and borrow loans, buy insurance, trade derivatives, trade assets, and more but it’s faster and doesn’t require paperwork or a third party.
The transactions are carried out with ease/instantly without delay.
With DeFi lending and borrowing protocols, you can deposit collateral and get your funds in no time, thereby skipping all the processes and protocols that will be encountered using a centralized service.
DeFi protocols
DeFi is developing into a full ecosystem of apps and protocols that provide value to consumers.
In this section, we’ll look at two of these protocols:
1. DeFi lending and borrowing protocol
By introducing lending and borrowing, DeFi has moved finance in a new direction. We regard it as Open Finance.
Just like centralized bodies or a personal individual lends fiat currency (money) as an investment to a fellow individual or an organization in need for a payback with an added interest, well DeFi has projects designed to carryout this function
Decentralized lending provided crypto projects/holders with lending options to generate yearly returns.
On the other hand, Decentralized borrowing allows individuals to borrow money at a fixed interest rate for a down payment. Some DeFi lending and borrowing platforms include Compound Finance and Aave.
2. Decentralized exchanges
Decentralized Exchanges (DEx) are an important part of DeFi since they allow users to exchange/swap tokens for other assets.
Centralized exchanges provide similar options, but the investments available are subject to the will and expenses of the exchange.
Another disadvantage of CExs that DExs address is the additional cost of each transaction. Some DEx platforms include Uniswap and dydx.
DeFi, The future of Finance.
DeFi, is a global financial system built on the blockchain.
Since the start of bitcoin in Jan 2009, It gave rise to this great technology called The blockchain technology which DeFi exists on and thus inherits its features and since then it has been evolving.
Every day new ideas and products are constantly designed and implemented all to make it scale.
With this technology, you’ll come to understand that “for every problem, there’s an innovation”.
Like DeFi was created to disrupt the financial system by solving problems, challenges, and inconsistencies in centralized finance.
Because we have seen real-world use cases/utilities implemented on the blockchain and are carried out more efficiently.
Everyone is welcome to take part in the governance of DeFi protocols and have a seat at the table where the world of decentralized finance is actively being formed.
The DeFi area is progressively catching up with the traditional financial system, despite some challenges that come with operating on the groundbreaking innovation.
The world of decentralized finance is on the rise and with everything being said, day-to-day centralization is slowly losing its grip as a new era of decentralization is birthed.
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