What is DeFi?

What is DeFi?

DeFi stands for Decentralized Finance, an ecosystem of financial applications deployed on distributed ledgers or blockchains. The ultimate aim of DeFi is to create open-source, transparent, and permissionless financial services easily accessible by everyone, unmindful of the economic climate. The significant difference between the centralized financial systems and DeFi is the presence of governing authority. CeFi is governed by a single authority, whereas smart contracts control the DeFi. Smart contracts are usually written in solidity and deployed over the blockchain to perform particular tasks. The tasks may be collecting funds in the liquidity pools or distributing rewards to the liquidity providers. The entire processes in DeFi are automated by smart contracts without any human intervention, making them genuine to the core. The users can interact with the DeFi system through decentralized applications (DApps) in a Peer-to-Peer fashion, without placing trust in third parties.

Advantages of DeFi

For the traditional financial systems, courts provided arbitrage, while DeFi uses smart contracts, and there are no controversies. There is no need for an arbitrator. The resolution for unfavorable situations is specified in the smart contracts, and the users can enjoy complete control over their assets. This effectively reduces the costs and paves the way for frictionless financial systems.

These decentralized financial applications are also built on top of the blockchain, and there are no single points of failure. The traditional CeFi applications use a client-server model to store the data, where the data are collectively stored in a single location, becoming the hotspot for potential hackers. DeFi applications store the data widely in every node of the blockchain, making it impossible to tamper with. DeFi applications are highly interoperable and can operate on any network relentlessly. DeFi gives the low-income community access to a broader range of modern financial solutions.

DeFi vs. Open banking

The open banking system we follow now allows third-party financial service providers to access financial data through APIs. This transfer of data between banking and non-banking institutions is not secured. This requires additional infrastructure that escalates the costs in addition to the processing fee associated with banks. DeFi proposes an entirely new modular infrastructure that is highly interoperable and is independent of the current ones. 

Closing thoughts

With the advent of new DeFi protocols that allow people to put their crypto assets to work, the DeFi has become the hottest trend in the cryptocurrency space. With DeFi applications, people can earn far more than what banks offer. DeFi has unique applications like yield farming, staking, NFT, and swapping, making it the best alternative for current centralized financial systems.