A Chapter of DeFi

Impossible to dabble in crypto and not confront the term Defi. And Defi being a crypto term, it will require some much needed explaining.

DeFi is short for decentralized finance, which is an umbrella term for financial services on public blockchains, with Ethereum being the most popular among users. With DeFi, you can do most of the things that banks support, earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more. but it’s faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), and open to all.

Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.  DeFi takes the basic premise of Bitcoin, digital money, and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries, marketing, employee bonuses), nor the control banks and institutions have on our everyday money, financial products, and financial services. This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection. 

A quick Google search of DeFi will return countless articles hyping DeFi's unprecedented financial upside and unthinkable annual yields. Similarly, you'll find even more about hacks, scams and illegitimacy within its ecosystem. But the ecosystem is growing fast, with the jury still out whether it will someday replace our current centralized financial system.

Today, almost every aspect of banking, lending and trading is managed by centralized systems, operated by governing bodies and gatekeepers. Regular consumers need to deal with a raft of financial middlemen to get access to everything from auto loans and mortgages to trading stocks and bonds.

In the U.S., regulatory bodies like the Federal Reserve and Securities and Exchange Commission (SEC) set the rules for the world of centralized financial institutions and brokerages, and Congress amends the rules over time.

As a result, there are few paths for consumers to access capital and financial services directly. They cannot bypass middlemen like banks, exchanges and lenders, who earn a percentage of every financial and banking transaction as profit. We all have to pay to play.

DeFi challenges this centralized financial system by disempowering middlemen and gatekeepers, and empowering everyday people via peer-to-peer exchanges.

“Decentralized finance is an unbundling of traditional finance,” says Rafael Cosman, CEO and co-founder of TrustToken. “DeFi takes the key elements of the work done by banks, exchanges and insurers today—like lending, borrowing and trading—and puts it in the hands of regular people.”

When you make a transaction in your conventional checking account, it’s recorded in a private ledger. Your banking transaction history is owned and managed by a large financial institution. DeFi would change all that, chronicling and storing our financial transactions on a decentralized public distributed blockchain where financial transactions are recorded in computer code.

In DeFi, those middlemen are replaced by software. Instead of transacting through banks and stock exchanges, people trade directly with one another, with blockchain-based smart contracts doing the work of making markets, settling trades and ensuring that the entire process is fair and trustworthy.

When we say that a blockchain is distributed, that means all parties using a DeFi application have access to an identical copy of the public ledger, which records each and every transaction in encrypted code. That secures the system by providing users with anonymity plus verification of payments and a record of asset ownership that’s nearly impossible to alter by fraudulent activity.

Advocates of DeFi assert that the decentralized blockchain makes financial transactions secure and more transparent than the private, opaque systems employed in centralized finance. Here are some examples of what DeFi can do

Traditional financial transactions: Anything from payments, trading securities and insurance, to lending and borrowing are already happening with DeFi.

Decentralized exchanges: (DEXs). Right now, most cryptocurrency investors use centralized exchanges like Coinbase or Gemini. DEXs facilitate peer-to-peer financial transactions and let users retain control over their money.

E-wallet: DeFi developers are creating digital wallets that can operate independently of the largest cryptocurrency exchanges and give investors access to everything from cryptocurrency to blockchain-based games. 

Dubbed the rocket fuel of crypto, DeFi makes it possible for speculative investors to lend crypto and potentially reap big rewards. 

In the DeFi world, the financial system functions by software, or code, programs commonly referred to as smart contracts. So when you execute a transaction, a smart contract handles the heavy lifting, connecting the correct parties and ensuring the transaction goes through. This is, by and large, how the cryptocurrency ecosystem functions, and one of the reasons DeFi continues to grow in prominence and importance.

The core idea behind DeFi is that all the products and services that are in the economy today can be transacted through self-executing automated code.

It's no secret that understanding the traditional finance world is challenging. Unfortunately, making sense of decentralized finance can be equally challenging.

Put simply, decentralized finance is a growing collection of financial tools built on top of  blockchain technology that exists across a collection of distributed servers. These platforms and protocols allow users to execute all their financial transactions digitally, all without a centralized bank or third-party intermediary. 

Thee future is now with Defi. The only question remains is how far will it grow.

 

 

 



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