Sans the jargons, DeFi in its humblest self is decentralized finance that got traction from the blockchain. It is the technology backing the digital currencies, christened as Bitcoin, Dogecoin, and Polkadot, are decentralized for various transactions.
A single central source does not control financial products available on a public decentralized blockchain network, thereby delimiting the speed and sophistication of transactions while offering users more direct control over their money. DeFi is distinct because it expands blockchain from simple value transfer to more complex financial use cases.
- Decentralized finance or DeFi aims to remove intermediaries for financial transactions between two parties by using technology
- DeFi got it traction from blockchain technology.
- DeFi is a nascent industry whose infrastructure is still being carved.
- DeFi is expected to take over and replace the rails of modern finance.
In a nutshell, DeFi’s functional system is created by software written on blockchains that make it easy for buyers, sellers, lenders, and borrowers to interact directly or with a strictly software-based intermediary rather than a company or institution facilitating a transaction.
Bitcoin and many other digital-native assets stand out from bequest digital payment processes, such as those run by Visa and PayPal, in that they remove all intermediaries from financial dealings. When one pays with a credit card for buying a product, a financial institution is between the cardholder and the business owner, with control over the exchange, retaining the authority to stop or pause it and put it in its private ledger. By using Digital currency, those institutions are cut out of the picture.
A host of technologies and protocols are used to achieve the goal of decentralization. A decentralized system can have a mix of open-source technologies, blockchain, and patented software. Smart contracts that automate agreement terms between buyers and sellers or lenders and borrowers make these financial products possible.
By the day volume of trading tokens and money locked in smart contracts within its ecosystem is witnessing a steady surge. However, DeFi is still a nascent industry whose infrastructure is still being carved. Regulation and oversight of DeFi are minimal or absent. In the future, however, DeFi is expected to take over and replace the rails of modern finance.
The total value locked in DeFi contracts is more than $41 billion as of March 2021. The total value locked is calculated by multiplying the number of tokens in the protocol and their value in USD. Though the total figure for DeFi may sound substantial, it is essential to remember that it is notional because many DeFi tokens lack sufficient liquidity and volume to trade in crypto markets.
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