– Decentralised finance, or DeFi for short, is a system in which customers can access financial products directly on a decentralised blockchain network, without the need for middlemen such as banks and brokerages.
– DeFi has grown immensely within the last year to become a sector valued in excess of US$250 billion. The industry grew more than 88 times in size between May 2020 and May 2021 – and it shows no signs of slowing down.
– The growth of DeFi can be explained by the appeal it has to consumers. To access financial products on public decentralized blockchain networks, consumers do not need a government-issued ID, a social security number, proof of address, or similar documentation. This opens up access to financial products to the billions of people who cannot access financial services because their data is not held on “traditional” sources.
– Another significant benefit of DeFi is that it removes most of the parties that have traditionally served as middlemen in financial transactions, such as payments infrastructure companies like PayPal or Visa. By removing these intermediaries, DeFi also removes many of the fees involved in each step of a financial transaction.
– ‘Smart contracts’ are programmes that run on blockchains and can be triggered automatically when certain conditions are met. These smart contracts help developers build far more sophisticated functionality than merely sending and receiving cryptocurrency.
For example, a smart contract could be used to establish a loan agreement between two people. If certain terms are not met, the collateral could be liquidated. All of this would happen automatically through computer code, doing away with the need for a bank or any other middleman.
Smart contacts such as these are used to build decentralised apps, or dapps for short. Dapps are like normal apps and offer similar functions. The key difference is that they are run on a peer-to-peer network, such as a blockchain, which means no single entity has control of the network.
– In this brave new world, we can move, store, manage, organize, govern, create, fragment and direct anything and everything of value to whatever end we desire, peer to peer. Financial services are no longer centralized within an industry; they are decentralized across blockchain networks such as Bitcoin, Ethereum, Solana, Terra Luna, Avalanche and Cosmos. Decentralized finance (DeFi) is shaking the windows and rattling the walls of Wall Street banks, government agencies and global institutions. Call it the DeFi Revolution.
– Every industry will feel DeFi’s impact, because finance is the cardiovascular system of the global economy, the lifeline of all other industries.
-To be clear, DeFi and DeFi staking is not fintech. Fintech applications, while important, still require banks and other intermediaries to establish trust between parties, verify account balances and perform the business logic — clearing, settling, contracting and so forth — that makes the system work. And in the end, most fintech innovation is digital wallpaper — a sleek user interface that conceals the old system beneath. Instead of slapping on a fresh coat of paint, DeFi reimagines finance from a networked point of view with digitally native assets, or tokens.
– By virtue of being decentralized, it is currently difficult to hold individuals or entities accountable for security failures, hacking incidents, and the theft of digital assets within the DeFi market.