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A Deep Dive into Decentralized Finance (DeFi): Revolutionizing Traditional Financial Systems with Blockchain

  • By Kiruthika Selvaraj
  • March 24, 2023
  • 1349 Views

Decentralized Finance (DeFi), as the name implies, refers to financial services taking place without the use of a traditional centralized intermediary. We can earn, buy, borrow, lend, and trade without the hassle of paperwork or third-party involvement. This is a very promising future for finance and can replace banks in a few years.

Blockchain and Defi

Defi runs on code that is built on the decentralized infrastructure of Ethereum blockchain technology. Ethereum is a programmable decentralized blockchain technology that uses smart contracts to securely verify and execute the application code. The deployment of immutable smart contracts allows Defi developers to run financial platforms and protocols that can be accessed by anyone with an internet connection. Decentralized Finance is the most active sector in the blockchain space.

Benefits

DeFi stands ahead of traditional banks for their numerous benefits. Some of them are:

    •  Easy accessibility:All you need is to create a wallet to gain access to Defi services
    •  Highly secure: The smart contracts are immutable, and no personal information is shared between the parties involved.
    •  Global: DeFi allows users to perform transactions throughout the world with no geographical limitations.
    •  Faster: Faster transactions due to the absence of intermediaries and borders, as well as the superior speed of the blockchain technology
    •  Autonomy: It does not rely on any centralized financial institutions and is not vulnerable to difficulty or bankruptcy. It also eliminates the fees that banks and other financial institutions charge for utilizing their services.

Disadvantages

There are also a few disadvantages you need to consider in DeFi. They are:

    •  Security issues:It isn’t without saying that even a high-end technology like DeFi is prone to security issues. The user needs to have specialized knowledge to keep their key holdings secure and keep themselves updated with service terms regarding the platforms, wallets, and the various DeFi protocols.
    •  No historical data: It is challenging to evaluate the related risk given the absence of historical data. The user would be needed to do extensive research on their own before making an investment decision.
    •  Third-party audit: As smart contracts are vulnerable to exploitation, there needs to be auditing done with all DeFi protocols, which can be expensive.
    •  Expensive: Active trading might become pricey due to the Ethereum blockchain’s fluctuating transaction rates.

Future of DeFi

    •  As blockchain applications continue to continue to grow and emerge, the future of DeFi will certainly acquire new users from throughout the world.
    •  Many countries have begun to welcome Defi to their markets for mainstream adoption. As new entries, mainly successful new start-ups, enter the DeFi market on a daily basis, the competition rises exponentially.
    •  Online gaming, particularly blockchain-based games, is becoming increasingly popular. With the help of DeFi, creators and players see this as a potential to monetize this platform.
    •  DeFi platforms are now allowing cross-operability function, which helps to scale much more easily to other networks.
    •  DeFi platforms’ tokens, called governance tokens, grant the holders voting rights over an underlying DeFi protocol giving them the decision-making power that traditional banks lack.

Conclusion

Decentralized finance is intended to offer customers an alternative to traditional financial institutions, which are frequently opaque and inaccessible. It is believed that DeFi would contribute to a more inclusive financial system by cashing in on the user friendliness and accessibility of the services.

Given that there are a few uncertainties and challenges for this emerging technology, the advantages definitely outweigh them. You have total control over finances, unlike traditional banks, and it allows you to spend tokenized money wherever and however you choose.

However, presently, traditional financial systems are still the mainstream financial transaction, and the introduction of DeFi is going to be very profitable in the near future.