DeFi is short for decentralized finance. In conventional finance, you need to rely on third-party institutions. They give you validation of lending, derivatives, payments, global money transfers and other financial products. For instance, in order to get a loan. You have to go to a bank that determines if you qualify or not. They dictate terms such as interest rate, payment terms, etc. Simply put, you have to essentially operate through a centralized system. DeFi is very much similar, except you have to rely on blockchains and smart contracts. It is a surefire way to get rid of all the red tapes. In addition, the DeFi economy does not exclude anyone on the planet.
You do not need a bank or third-party institution to provide validation for loans or any of the financial products. A classic example would be the case of Stablecoin. It eliminates the need for working with a bank, in order to deal with fiat currencies. Stable coin lets you store and manage your fiat assets from a digital wallet, stored in a blockchain network. You are effectively relying on blockchain to secure your funds. That pretty much sums up how DeFi works. DeFi works on the Ethereum platform for the most part. These types of transactions are happening more and more. It has come to a point, where more than a billion U.S dollars are locked up in DeFi on the Ethereum platform.
What makes DeFi powerful?
Decentralized Finance is an economy in itself. It is simple, secure and profitable. In its lending business, you do not need a bank to give you that loan or document. DeFi relies on collateral and smart contracts to settle the debts. The top lending product, Maker uses DAI, its own Stablecoin that locks up collateral. DAI comes into play when a user takes a collateralized debt position (CDP), by depositing collaterals such as invoice, properties and bonds. A portion of the collateral’s value is paid out in newly minted DAI. Like a coin, DAI is a smart currency that keeps growing on interest.
In addition, a smart contract replaces custody solutions and eliminates counterparty risks. Simply put, DeFi creates a distributed, transparent and trustless economy. Besides custody, huge institutions belonging to conventional lending costs you money. It is cheaper to write a smart contact than to run a bank. The huge amount of money that these institutions require for operations is a loss to the end-user. Hence, in DeFi lending products, users get higher interest rates as well as cheaper loans. Moreover, DeFi lending products such as Compound offers algorithmic, autonomous interest rates.
Complete Financial Independence
To participate in conventional finance, banks ask a lot from you. Starting from personal data to credit score to minimum deposits, there are several catches. It is quick to exclude people from the system rather than adding them in. On the other hand, DeFi solutions do not exclude anyone. It caters to the unbanked and underbanked demographic just as same as the privileged class. In addition, it goes just about business, regardless of the current economic climate in your territory. Your digital money easily travels across borders and breaks all barriers. DeFi projects range from payment services, investment platforms, lending programs, wallet apps, exchange and trading platforms to stablecoins and insurance services. The scope, usage and market size of Decentralized Finance and its products is increasing rapidly and we are definitely witnessing the transformation of the traditional economy into Decentralized digital economy. The way the market cap and locked up capital is increasing in the DeFi marketplace we can easily expect it to make a clear difference in the global economy in the coming years.