Overview of decentralized finance (DeFi) and its impact on the financial sector

What is Decentralized Finance (DeFi)

Decentralized Finance or the DeFi is an ice-breaking technology that is based on the secured distributed ledger. 

This is a technology that aims to surpass the challenges faced by the traditional banking system and replace them with adept solutions. DeFi is designed to replace the traditional financial system and is open, decentralized, and free-from-permission banking that is based on blockchain. We know that when blockchain comes, it brings along encryption and top-notch security. DeFi is based on peer-to-peer terminology that eliminates the role of third parties. DeFi in a way democratizes finance by relying on the said terminology and the smart contracts on the blockchain network.

The smart contract technology used by DeFi over the blockchain network with no or zero human intervention. This technology is a clear way to reduce the chances of errors in transactions and enhance efficiency by 10x. 

An Overview of DeFi

The DeFi protocol generally uses computer codes that are precisely known as the Smart Contracts which work on the blockchain networks. The working of this protocol is not a hard nut to crack. The source code of DeFi projects is accessible to people across the world for checking & auditing easily. The DeFi app development is beneficial for the users efficiently because users of the DeFi protocol have the perks of communicating via these smart contracts. They can easily transfer funds, lend, borrow, or avail of any service provided by DeFi efficiently. 

Due to the decentralized nature some of the DeFi projects like Uniswap have gained prominence in global financial institutions exclusively. Furthermore, the DeFi projects lined up over the blockchain network provide users with convenient and cheaper access to capital, adept lending & borrowing along with decentralized stock and crypto exchanges. 

Moreover, since there is an evident elimination of the middlemen, DeFi adds to providing financial services at a much lower cost. On top of that, since the nature of the blockchain networks is immutable, which means that whenever a piece of information is updated over the blockchain network, it cannot be altered or changed. 

Simultaneously, this technology breeds a financial system that is simply relied on the code. One of the popular DeFi platforms is Decentralized Exchange (DEX).

How Does DeFi Work

DeFi uses blockchain technology which is used by cryptocurrencies as well. We all know that the blockchain is a distributed ledger that obtains a secure database in it. The working of DeFi is majorly carried out by the applications that are known as dApps, and they are responsible for handling the transactions and effectively running over the blockchain. 

Moving further, the transactions get recorded in the blockchain precisely which further can be verified by the other users simultaneously. Once these verifiers come to a point of making a transaction then that block gets closed and encrypted then are there. Similarly, a new block gets created along with the data and information of the previous block. 

Following the same momentum, the blocks get chained together having a cluster of information in it and forming the blockchain. Most importantly, the information of a particular block cannot be changed without altering or changing the information of the previous or following blocks altogether. Henceforth, the effect of this concept along with other security protocols leads to the added security of the DeFi working altogether.

Uses of DeFi

DeFi or the decentralized financial system has a lot of users and is successfully gaining more users with amplified speed. One of the core premises of DeFi is peer-to-peer (P2P) financial transactions. A P2P DeFi transaction is when two parties decide on exchanging cryptocurrencies and trading with goods and services. And here there is no involvement of any third party at all. 

The P2P DeFi has varied perks, as it can also disburse loans. Basically, here is the algorithm that matches the users with a mutual agreement on the lender’s terms & conditions, and when that happens, a loan is allotted. All the payments made in the DeFi are done by a decentralized application which is commonly addressed as dApps and the transactions take place using the same blockchain process. 

However, the use of DeFi exceedingly allows;

Better Accessibility

There are no geographical restrictions when it comes to the accessibility of DeFi. Making the transactions and accessing the DeFI platform is simple and easy for any user who has an internet connection.

Better Interest Fee & Cost Effective

Two parties can easily negotiate the interest rates by the DeFi platforms with ease & efficiency. 

Transparency & Security

Smart Contracts based on blockchain technology are available for all users to review but the revealing of identities is never an option. Hence, you can be certain about trading anonymously with being sure about your data and information same as well.

The Autonomy

The DeFi platforms are completely free from the hassle of centralization. Basically, there is no centralized financial institution that DeFi is associated with, therefore there are no chances of bankruptcy or adversity.

DeFi & its Importance in Financial Sector

The financial world has seen a drastic change with the advent of DeFi in the past few years. A technology named Automated Market Makers (AMM) helps decentralized exchanges to have liquidity by offering certain asset-specific liquidity pools. The users have the benefit of providing liquidity in those pools and lucratively earning more income or money via the trading fee. 

The major reason for DeFi being so popular in the financial sector is the fact that, unlike centralized financial institutions, DeFi has no involvement of intermediaries. There is no requirement for any type of custodian for providing services like purchasing, selling, borrowing & lending of the Crypto assets evidently. With the great benefit of lower barriers to entry into the financial system, DeFi is getting its feets stronger in the financial sector exclusively.

With the decentralized exchanges providing the entire world with easy access to financial perks and cheaper credits, the landscape of the financial sector is indeed changing and growing for the better. 

The Future of DeFi

The genre of decentralized finance is evolving in a constant mode. There are chances for the improvement of DeFi with a regulatory upgradation in its system. The borderless transactions of the DeFi are a questionable factor for the type of regulations and simultaneous functionality. 

One of the major concerns that added to the regulation aspect is what if a financial crime takes place across the borders in light of the protocols and DeFi Apps. There must be a regulatory authority to investigate and enforce. 

In any case, the prosperity and betterment of this technology are taking place and the dApps and DEX are going to have conventional and adept growth. 

Conclusion

DeFi is owning its place in the digital world and hence, the ROI insights from this arena are in bulk as well. We hope that we have been successful in clearing your doubts with DeFi and providing you with more insights into this industry. Availing of lucrative perks for an entrepreneur from this industry is evident. Therefore, if you want to get your DeFi platform developed then you can easily connect to the DeFi experts at Blocktunix.

Get going fast, the demand for DeFi platforms is increasing and so is the competition!