Decentralized Finance: Decoding Finance with DeFi.

June 17, 2021
Mai Anh
DeFi

Are you paying commission for your international payment transactions to a bank or online payment systems?

We know there are only a few ways of sending money, it with a bank where you need to hold an account and minimum balance, or with the online payment system that verifies your mail ID and bank account. 

But before we think of transactions with these payment systems, we often worry about the commission they charge customers or as a buyer.

We don’t like the commission systems obtained by the centralized financial institutions, but until now didn’t have a choice.

What if we tell you, that we have a choice? A choice of choosing these decentralized financial systems over the centralized financial system.

DeFi ecosystem on Ethereum

Decentralized financial system DeFi:

DeFi is an ecosystem of apps dealing with cryptocurrency to replace financial intermediaries.

In the decentralized financial system, you step up your cryptocurrency or your crypto assents and transact person to person, business to business without any intermediary.

While blockchain is in the way of disrupting other industries, one of the industries that have already got its way through it is the finance industry. With the introduction of bitcoin, peer-to-peer electronic cash system, blockchain transaction records using Digital Ledger is made for quick, transparent cash transfer. 

DeFi, known as Open Finance is an alternative to the existing financial system. Once you send your money to buy a product or to your peer, it stores in a digital ledger using smart contracts. 

This can be viewed by everyone.

Smart Contracts programmed in Ethereum are widely used in DeFi to secure the information from hackers or changes. 

DeFi is used in a variety of use cases

  1. Sending/ receiving money
  2. Loans/ lines of credit
  3. Buying/ selling assets
  4. Earn Interest
  5. Trading stocks or cryptocurrencies.

How DeFi benefit?

Do you want to avail the benefits of DeFi? 

DeFi depends on two-core dependencies, which are the internet and a device to access the internet. Unlike the centralized system of banking, DeFi is devoid of government influences and interventions. 

Most of the countries have seen the after-effects of the Banking crisis. Centralized banking is a major reason for the banking crisis. Working on governments’ decisions, banks end up giving additional loans beyond their capacity. Banks work by managing the common man’s money to approve loans or use it in the share so that they gain additional profits from the saved amount. 

Countries including U.S, U.K, Belgian Russia, Spanish including the latest Venezuelan and Ghana banking crisis. 

Not only do banks suffer due to the changing government policies but it’s a common citizen who is at the loss. 

Internet connections have connected the world but in some countries majority of the population don’t have access to financial services. 

DeFi works where the internet and connectivity works. It challenges the current systems by:

  1. Available global and being transparent.
  2. Removes the centralized banking systems
  3. Increases the access to financial institutions, that are excluded from the financial system,
  4. Third-party is avoided since it depends on peer-to-peer networks and connections.
  5. Works on blockchains, the smart contracts developed are self-executing.
  6. Ensures safety and transparency.

Use Cases in the finance industry:

For the setback provided by the centralized system, the DeFi is a favorable solution. It re-invents the banking system by removing middlemen to provide opportunities to the common man.

1. Open leading Platforms:

 Open lending platforms like Aave, Maker are built on Ethereum provides protocols to ease the lending activities. This ensures the standardization and collateralization of digital assets, for instance, transaction settlement along with zero credit checks.

Blockchain technology ensures trust and functionality using cryptographic verification. The counterparty risk, cost-effectiveness makes it better than conventional credit lending systems.

2. Decentralized transactions:

Decentralized transactions remove the importance of centralized authorities that hold your digital assets. Crypto trading platforms are also known as DEX ( Decentralised Exchange) like Matcha, promote non-custodial transactions and ensures peer-to-peer connections.

Smart contracts for automation trading reduces cost.

3. Stablecoins, insurance, and Mortgages:

The use of Defi for Insurance, mortgages, and stable coins speeds up the process and remove intermediaries. DeFi also increases the speed and reduces the cost by leveraging smart contracts.

Advantages of DeFi:

1. No permission required:

Accessing various banking services requires permission, DeFi is permissionless. It improves the accessibility for the people who cannot access banking facilities. One such example is DIA a stablecoin that is regulated by MakerDAO. Current DIA rates are more than USD.

2. Flexible earning opportunities:

Passive interest can be generated using cryptocoins from decentralized lending platforms. The apps utilize your crypto coins for others to borrow, this gets you a better interest than centralized banking systems.

3. More opportunity for innovation:

DeFi ecosystem builds innovation by allowing the next generation Ethereum apps to serve as an alternative for the financial sector. The creation of these apps directly connects the buyers and seller, hence improves trust and benefits the seller.

4. Improve open access with trust:

Since the apps are designed on blockchains and go through the audit trials, it enables transparency and assures trust between peers. The transactions are made digital in public space, for everyone to know about this transactions. 

5. Control on customers:

Unlink centralized systems, a DeFi customer can have complete control over their finances. They decide on their investments to gain better interest rates using blockchain than provided by banks in various schemes.

To Summarize:

DeFi is an ecosystem of apps that are created on Etherum, once accepts by a larger mass, it will eliminate the third party and provide censorship resistance. Build on blockchain infrastructure, it provides inexpensive transactions for the entire humanity and user possession of private keys, to ensure full control of customers’ assets to them.

Grows via a network, it is a platform for innovation in the financial sector. With the participation of the masses, its performance will be appreciated to bring the global financial ecosystem to blockchain financial apps.