An area in cryptocurrency that has been receiving huge attention is DeFi. Also known as decentralized finance, DeFi is a financial service that utilizes smart contracts. Smart contracts refer to automated and enforceable agreements. The contracts use blockchain technology and do not require a bank or a lawyer.
Since DeFi uses blockchain technology, transactions are faster than centralized that use humans and gatekeepers. Moreover, centralized systems lack the sophistication and direct control that comes with DeFi. Unlike traditional systems, decentralized finance allows blockchain to transform from simple to complex.
To make you understand, when you decide to purchase a product online, a financial institution will stand between you and the seller if you choose to use digital money services providers, including PayPal and Visa. However, no financial institution and regulator will come between you and the seller if you are using Crypto. This will give you more control over the transactions.
What most individuals fail to realize is that crypto is not only used for direct purchases. It is also used in various financial applications, including insurance, crowdfunding, derivatives, betting, and loans. Eliminating middlemen is one of the biggest advantages of DeFi. In the past, DeFi was known as open finances.
Common DeFi use cases:
- Users can now borrow and lend crypto and earn interest through various platforms.
- DeFi now allows users to bet and gamble.
- Participate in no-loss lottery.
- Buy stablecoins. Stablecoins are fixed to the value of a specific commodity and currency.
What is the Origin of DeFi?
Although the term DeFi became popular in 2020, decentralized finance took off with Bitcoin. The development of Bitcoin motivated developers to create a decentralized system. Most DeFi applications are hosted on the ethereum network. Ethereum is a popular blockchain. It is also known as the next internet due to its ability to handle many services and connect people all over the world.
Why is DeFi the Craze Right Now?
Like mentioned earlier, DeFi gives users the freedom they deserve. It also comes with a ton of other benefits. Continue reading to discover the top benefits of DeFi.
- More Accessible
One of the major benefits of DeFi is that it is readily accessible. Anyone with a reliable internet connection can access DeFi at any time of the day. In most cases, users only experience issues when trying to get their money from regulated financial institutions. The good news is that they can now overcome this challenge by using several payment gateways.
Individuals in developing countries where the banking system is undeveloped can now take advantage of DeFi to access vital business services at any time of the day using their personal computer and smartphone.
- Full Control
DeFi is based on the Ethereum blockchain, which is decentralized and run by the people. This means there is no centralized institution that will control your transactions and revoke your account. With DeFi, you will have total ownership over your transactions and assets.
Again, the government does not regulate the Ethereum network. This means that the government cannot shut it down. Above all, each node has an ultimate copy of the network to verify each transaction. In addition to that, the network is difficult to hack and modify since it is tamper-resistant. However, you must own more than 51% of the nodes to modify the transactions.
The open banking movement has been growing in popularity across the country and the world. What most people are not aware of is that this model is already present in DeFi. With this system, each transaction is made public and verified by the community. This means that DeFi provides more symmetry between pro traders and the users. Moreover, users can easily monitor the amount of protocol that has been used and the existing current rates.
Another huge advantage of DeFi is that it is based on the Ethereum network based on the open-source code. This means that each user can see how the platform works, create new platforms and protocols.
- Be Part of the Change
Do you love experiments? Using DeFi will allow you to be part of a global experiment that makes huge changes in the financial world. That is why DeFi is popularly known as money Legos. This analogy explains the highly flexible nature of DeFi. The better part is that DeFi is traded in units allowing users to trade and earn dividends.
What are the Common Concerns Around DeFi?
There is no denying that DeFi provides several benefits and opportunities for investors and users. However, it also has a few risks that you should consider. Here are some of the common risks surrounding DeFi:
One of the greatest risks surrounding DeFi is its transparency. Cybercriminals can exploit this advantage for their selfish gains. All the funds will be at risk if the cybercriminals find a way of exploiting the funds.
The good news is that you can overcome this challenge by ensuring that each protocol you are using has been independently and publicly verified.
Although this feature seeks to put more power in the users’ hands, it can be used against the systems. The problem is that the crucial decisions are left in the hands of the token holders. It would be best to monitor all the changes that could affect all your returns.
Another huge problem around DeFi is that it is controlled using admin keys. The real problems begin if the key holders fail to take proper care. You will be glad to know that most keyholders use advanced security tools and time locks to protect the DeFi smart contracts.
Several factors can put your investment at risk, including volatility and collateralized loans. You do not have to worry about high volatility if you use less volatile assets to overcome the risks.
The future of DeFi has never been this healthy. As more and more people switch to an open and decentralized system, you can expect more tokenized assets in the future.