What is DeFi?
“DeFi” is the acronym for Decentralized Finance. It comes up as a revolutionary financial system, which can operate without any external help. Moreover, the Decentralized Finance or DeFi is not connected to any centralized financial intermediary.
The main goal of DeFi is to enable its users to invest, trade, transact, and transfer peer-to-peer with the help of digital assets and cryptocurrencies through smart contracts. All these conveniences of DeFi have kept the requirements for expensive and slow intermediaries at bay.
Advanced distributed ledger technology or DLT (also known as blockchain) has laid the base of DeFi. Blockchain can change the present financial structure and enable a more unbiased as well as transparent financial system.
One of the best features of DeFi is its blockchain expansion capability from simple value transfers to further elaborate financial use cases, including yield farming, trading, derivatives, lending, etc.
How is DeFi Important?
The importance of DeFi lies in the flaws of the traditional financial system. In other words, the traditional financial system may seem expensive and slow to customers. Furthermore, centralized financial systems can be a target of hackers. It is also susceptible to security failures as well as data breaches.
For instance, if a person relies fully on a centralized financial system for all his/her money, there may be potential risks on the way. If the centralized financial system decides to escalate fees, gets attacked by a hacker, experiences data breaches, makes bad investments, etc, the customer would also need to bear the loss.
On the other hand, DeFi comes as decentralized by nature. That means all services, products, assets, and applications of DeFi are decentralized. That means they are not prone to many drawbacks that are seen in centralized financial systems.
Furthermore, a large number of people are not capable of accessing traditional financial systems, as they do not comply with specific criteria set by the system.
Many people living in wealthy geographical regions or developed nations may not believe this fact. But, the fact is many people worldwide cannot access traditional financial services due to many factors, such as geographical seclusion.
Nonetheless, DeFi and cryptocurrencies allow everyone (having an internet connection) to make use of financial services without any discrimination. Moreover, financial services in this regard are equitable, affordable, and user-friendly.
Benefits of DeFi
One of the key benefits of the decentralized financial system is flexibility in trading and transaction at any place, any time (for now mostly having an internet connection is mandatory).
Moreover, DeFi can also transfer funds at a blazing fast speed. It has further dramatically alleviated charges as well as fees. Since the number of intermediaries in DeFi is fewer, users can expect to receive more benefits than the traditional financial system.
For instance, DeFi lending protocols often come with higher interest rates when it comes to deposits. That means users can expect to receive more profits with DeFi.
Furthermore, DeFi believes to provide unbiased access to all financial services. Many people cannot access financial services due to not complying with the fixed criteria. DeFi can pose great help to them.
Another excellent benefit of DeFi is “yield farming,” which is a trading of very high yield. Yield farming has made it possible for investors to lend and borrow their cryptocurrencies at excellent rates, more than the traditional financial system.