(DeFi) decentralized finance: What is it and what are the benefits?
One of the most important inventions in the past decade has not been blockchain technology, rather it is one of the offshoots of blockchain-decentralized finance (DeFi). It has the potential to revolutionize how world finance operates since it is gaining popularity slowly. Hence, DeFi news has become part and parcel of almost everyone associated with crypto and blockchains.
The technology uses the best aspects of the blockchain’s distributed ledger and the DApps (decentralized apps), built using smart contracts, to give us the solution to our financial woes. This article will tell you all you need to know about DeFi and its benefits.
What is decentralized finance?
It is a term that categorizes several financial services, such as lending, borrowing, trading, money transfers, payments, etc. These financial services are built on the blockchain and involve cryptocurrencies and smart contracts that execute automatically.
Decentralized finance is different from traditional finance as it has no centralized authority or an intermediary like banks or other financial institutions that govern them. Hence, it is decentralized, permissionless and not controlled or governed by any entity.
Benefits of DeFi
- Since it is not controlled or governed by any entity or individual, anyone with a device connected to the internet can gain access to decentralized financial services.
- All the transactions are completely transparent and available for anyone to scrutinize.
- The blockchain’s immutable nature makes these transactions secure from tampering or wrongdoings.
- It involves using personal wallets, so the users have complete control over the assets.
The future of DeFi
Decentralized finance had already seen a boom in 2019 when hundreds and thousands of decentralized projects, tokens, etc., came into existence. Since then, the entire cryptocurrency space has grown considerably. And with the collapse of FTX, people are again moving back towards decentralization.
Against such a backdrop, the future looks very promising. There is going to be a growth in the number of DeFi tokens and projects. This would, in turn, facilitate the growth of decentralized lending, borrowings, investments and trading.
Moreover, as the mass adoption of cryptocurrencies and blockchain technology occurs with time, cross-border and international payments are going to rely more on DeFi as these transactions are almost instantaneous and almost free of cost.
Possible risks
DeFi is a nascent technology that has a lot of benefits but also carries many inherent risks associated with it. One of the major risks associated with it is that the transactions are carried out using self-executory smart contracts. Hence, if a wrong transaction occurs, there is no way of reversing it. Smart contracts also have the risks of bugs and oracles malfunctioning.
Moreover, since it is transparent, it also has a risk of malicious actors such as hackers and cyber attacks. Decentralized finance, like cryptocurrencies, is highly unregulated, and no consumer protection measures are in place. On top of that, crypto markets are highly volatile, and the prices of DeFi tokens can also fall drastically, making them worthless.
Conclusion
The world has been facing an economic downturn for some time now, and a common person is the one that has suffered the most due to it. A decentralized financial system is a threat to discriminatory global financial systems and gives power and control back to people regarding their finances.
However, blockchain technology and DeFi have slowly but steadily started to cement their position and give financial freedom to the people. The technology is still in its early stages and has some inherent risks. Hence, you can keep in touch with the latest DeFi news today but be careful before going all in.
