Decentralized finance (Defi) is a term used to describe financial services provided by the public blockchain systems, especially Ethereum. Defi allows you to earn interest, loan, rent, carry insurance, trade commodities, swap assets, and more. The plus point is that it’s faster and doesn’t require paperwork or a third party. Like crypto in general, Defi is global, interpersonal (directly between two individuals, not through a centralized system), completely anonymous, and open to everybody.
Why is it important?
Defi builds on Bitcoin’s underlying premise of digital money to offer completely virtual and augmented reality to Wall Street without the costs such as office towers, banker salaries, and trading floors. This can create more open, honest, and competitive financial markets accessible to anybody with an online connection.
What are the benefits of DeFi?
- There is no need to “open” an account or submit an application. To acquire access, you only need to establish a wallet.
- DeFi does not require you to provide your name, email id, or other private information.
- You may move your resources anywhere without gaining permission, waiting for long transfers, or investing exorbitant fees.
- The rate of interest and rewards are changed frequently (every 15 seconds or less), and they may be significantly higher than on regular Wall Street.
- Everyone involved can see the whole set of transactions.
How does it work?
Users connect with Defi using dapps (“decentralized apps”). The bulk of these is currently built on the Ethereum blockchain. Unlike a regular bank, there is no need to fill out an application or open an account.
People are using Defi in various ways today, including lending, obtaining a loan, trading, buying derivatives, and saving for the future.
What are the downsides?
- Due to fluctuating transaction rates, active trading on the Ethereum blockchain might become costly.
- Your investment may see considerable volatility depending on which dapps you use and how you use them — after all, this is new technology.
- For tax purposes, you must keep your records. Regulations differ from one location to the next.
- DeFi is still prone to scamming
Will DeFi get rid of bank?
Well known billionaire investor (and regular on Shark Tank) Mark Cuban is bullish on the growth of DeFi, or decentralized finance, and dapps. He thinks that they will pose a challenge to traditional banks. After all, anyone can lend cryptocurrency to earn interest. In turn, that the borrower can exchange the cryptocurrency for fiat currency to use in the real world. He also does add that banks are wise enough to understand the threat posed by DeFi and are also researching their use case to reduce operational costs.
In conclusion, we believe the banking industry will reach a consensus to adopt DeFi measures in their financial operations.