Decentralized Finance

With the booming rise of cryptocurrencies into a trillion-dollar industry. It ignites a global spark of disruption of financial institutions.

With advancement and innovation in cryptocurrencies along with recent series of events that shaped the crypto space for prominent growth. Establishing Bitcoin and other cryptocurrencies as a promising asset. However, financial institutions don't consider cryptocurrencies as a significant investment due to its price volatility, lack of stability and adoption.

Economic value exchange in financial markets drives the prosperity of society. In a centralized space, Whenever a person invests. They necessarily have to include intermediaries of financial institutions such as banks. Such financial institutions or intermediaries take away the control from the individual and put it under the dominance of central authorities or government institutions. Detracting the control and authority of financial mobility from the individual by imposing regressive financial constraints of regulation. 

When central institutions and governments hoards the dashboard of financial command and steer its power over the masses. Risk accumulation endangers the entire system of financial jurisdiction into the bargain of its population. The 2008 financial crisis and the great recession are the precedent examples when financial institutions failed to ascertain the risk in the market. 

Centralized Finance 

In centralized finance, Your money is held by banks and corporations whose overarching purpose is to make money off your money. The centralized financial system is full of third parties and intermediaries who facilitate the monetary movement among several parties. Each one charges fees for the usage and availability of their service. 

A business extending the option for its customers to use credit and debit cards. To facilitate any such particular method of transaction banks and corporations charge fees from the business. Along with charges at several checkpoints. However, disregarding the time taken to commit the transaction. 

Decentralized Finance (DeFi) 

Decentralized Finance is a financial system built on blockchain technology. It eliminates intermediaries by allowing businesses and people to conduct financial transactions through emerging technology accomplished by financial networks, connectivity protocols, connecting software and hardware. 

Anyone with an internet connection can access the financial services of finance decentralization. As it uses a distributed database that is accessible across locations on the globe. It collects transacting information of all the users and facilitates a particular transaction by using a consensus mechanism of verification. 

Decentralized Finance becomes a combating opponent of centralized finance models by enabling anyone to access financial services. Irrespective of their economic, social, cultural and geographical constraints. 

The DeFi system removes the dominance of banks, corporations, financial institutions and government institutions. As it aims at creating a financial system that is open for all. It also minimizes the need to trust any intermediaries or banks, financial institutions and reduces reliance on the central authorities. 

It wipes away the authoritarian control banks and financial institutions like to keep over the financial mobility of the individual.

You hold your money in a secure digital wallet. Instead of keeping it in a bank account that requires tons of documents like government-issued identification, address proof, social security, etc. The individual can transfer funds in minutes and seconds anywhere around the globe with no extra charges or fees of transaction.

DeFi is built on the blockchain technology that uses smart contracts to enforce verification providing peer to peer protocols of security, protection and reliability. 

Smart Contracts 

Smart contracts are automated enforceable agreements which don't include any intermediaries for the verification and execution of the transaction. They are a self-executing contract of terms of agreements between the buyers and sellers which is directly recorded into the line of code of the distributed database of a decentralized blockchain network. The transactions which are executed on the decentralized blockchain network are traceable and irreversible.

Smart contracts permit only trusted transactions and agreements to be implemented among anonymous parties. Eliminating central authorities, financial institutions, legal institutions and other enforcement agencies and mechanisms. 

While blockchain technology has become a primary foundation of decentralization. It has initiated the evolution of the virtual currency realm.

Smart contracts were first proposed by an American computer scientist Nick Szabo, who invented a virtual currency called '' Bit Gold'' in 1998. Precisely 10 years before the invention of Bitcoin. Szabo is rumored to be the anonymous inventor of Bitcoin. 

Szabo spelt smart contracts as computerized transaction protocols that implement the terms of a contract. He aimed to extend the functionality of electronic transaction methods into the digital sphere. 

Smart contracts allow multiple parties to interact with each other maintaining the reliability and anonymity of the users. 

The proficiency of blockchain to deploy on the potential of smart contracts makes it ideal for utilization in the decentralized financial applications 

Services of Decentralized Finance(DeFi) 

Decentralized finance takes the premise of digital money/currency and expands on it creating a digital alternative of Wall Street excluding all the associated costs. It creates an open and fair space for financial markets. 

• Lend

 It allows lending out cryptocurrencies and earning interest over it. In DeFi rewards of interest are offered every day. Unlike centralized finance where interest is given every month. 

• Loan

In DeFi, Obtaining a loan is a rapid process eliminating days of hassle of paperwork. It also offers short term loans known as 'flash loans' which isn't a possible course of action in a centralized model. 

• Trade 

DeFi follows a peer-to-peer protocol of security to trade cryptocurrencies and other digital assets. Trading in DeFi is just like trading stocks excluding the cost of brokerage. 

• Save

DeFi allows an effective alternative to saving accounts in which cryptocurrencies can earn interest. 

• Derivative 

DeFi gives a choice of derivative where users can make long and short term bets on certain assets and cryptocurrencies to earn rewards. 

• Exchange 

Decentralized exchange(DEx) is a feature of DeFi. It allows users to exchange and swap tokens with other assets and cryptocurrencies. 

• Evaluate 

In DeFi, Total value locked(TVL) is a mechanism where the sum value of all cryptocurrencies staked, loaned and deposited by a user can be evaluated. It can also represent the sum of any specific cryptocurrency used for financial activities. 

Benefits of Decentralized Finance(DeFi) 

Decentralized finance is an ecosystem of protocols providing services to millions of users across the globe. Assets worth over $30 billion are present in the DeFi ecosystem which is one of the fastest-growing blockchain spaces. As it dispenses several features of benefit & security to its users. 

• Open 

 Anyone can access the services of DeFi from anywhere around the globe by simply creating a wallet. 

• Pseudonym

It doesn't ask for a name, email address or any personal information. DeFi keeps the identity of its users anonymous. 

• Flexible 

You can move your assets anywhere at any time without paying any extra fees and need of approval of permission. 

• Fast 

Interest rates and rewards are rapidly updated giving significantly higher returns. 

• Transparent 

Everyone in the network can see the complete set of transactions. 

Drawbacks of Decentralized Finance(DeFi) 

1. Fluctuation in the rate of return on the blockchain network can make active trading expensive. 
2. Personal records of transactions has to be maintained by the individual for tax purposes. As regulations vary from region to region. 

Future of Decentralized Finance(DeFi) 

Decentralized finance is a growing space with recent advancements and innovations in the technological sphere. It is a global financial system that is being shaped by its own population. Anyone can take part in the governance of DeFi protocols and become an active part where decentralized finance is actively in creation.