In this great coalition of life, one thing that keeps everyone moving is money. Over centuries, the form of money has changed and every time for good reasons, offering newer features and lesser inflexibility to users with each change.
Money has led to a creation of a financial system that helped humanity grow and survive. However, they’ve substantially been consolidated, meaning that a single authority figure or body controls an entire region’s financial system.
What is DeFi?
Decentralized Finance (DeFi) radically changes how we distribute and use financial instruments. Built on blockchain technology, it decentralizes the financial network, so no single entity or person can control the public’s money or banks. In other words, it removes the middleman from all deals and gives users lesser control over their money and deals.
The deals run on smart contracts, which are executable contracts that run on automated protocols. No one can change them once the rules of the smart contracts are set. By using a set of tools and blockchain technology, DeFi reduces the functional pitfalls in financial deals.
How is DeFi different from traditional finance?
Bitcoin is decentralized digital money grounded in blockchain technology that enables peer-to-peer deals over the internet without counting on intermediaries. Thus, once the deals are recorded and stored on the blockchain, they can not be deleted or manipulated, making the blockchain the single source of truth that no one can deny.
The foundation of DeFi is on the rise on the same principle. So by using different DeFi protocols, users can conduct various financial deals without counting on intermediaries. Moreover, all the deals, data, and rules stored on the blockchain are transparent. DeFi platforms now allow users to earn interest on crypto, exchange crypto, and trade crypto derivatives.
1. Low entry barrier
The central financial system has a high entry hedge barrier. This means that you must fulfill multiple eligibility criteria specified by the banks to open accounts, withdraw money, etc.
In Defi, there’s no such entry barrier, and people with an internet connection can transact on DeFi platforms. Furthermore, the DeFi ecosystem is permissionless, so anyone with a crypto wallet and stable internet connection can distribute on DeFi platforms regardless of one’s geographical position and minimal account balance.
2. Deals are cheaper
DeFi cuts out intermediaries from the sale processes, saving time and money. A sale on a DeFi platform requires you to pay just the blockchain network fee, which is usually a percentage of the total sale value.
3. Access to global financial products and liquidity
DeFi is borderless, meaning there are no geographical restrictions on the operation of DeFi platforms, and users can access the platform seamlessly. For illustration, through DeFi advancing platforms, you can transfer money to a person living in the United States or anywhere in the world and earn interest on the funds transferred.
To summarize DeFi, it’s a shadow banking system with no one in charge. We’re presently living through a veritably early stage of a massive paradigm shift in the financial ecosystem, bringing further transparency, effectiveness, and responsibility into the fiscal system.