DEFI is the abbreviation of decentralized finance. Shortly it means a variety of financial applications and services in the blockchain. It is geared toward disrupting the governmental controlled traditional finance world. It is inspired by and built on blockchain technology that uses smart contracts. If you can access the Internet you can access DEFI of course.
Decentralized finance offers a global and public-open alternative financial system. In which you can borrow, save, invest, and trade. It is based on open-source technology. It can be seen and auditable by everyone.
The Short Story Of Defi
As we seek the origin of DEFI, we should go back to the 1980s. We should go back to the advancement in cryptography. Since then, a series of events built the infrastructure of crypto space. The first important cornerstone was the launch of the first cryptocurrency -Bitcoin- in 2009. Ethereum followed Bitcoin with remarkable development in a few years. As said by Camila Russo, founder of Defiant, Bitcoin wanted to be peer-to-peer money, Ethereum wanted to be peer-to-peer everything. The launch of Ethereum and more specifically smart contracts enabled the transformation of the traditional financial system to decentralized finance by using blockchains.
Term of DEFI was born in a Telegram chat in 2018. Software developers and entrepreneurs were pondering on automated, set up on blockchain, and capable of stripping out the traditional financial system. Consequently, after three years decentralized finance is a big deal. Millions of people use crypto wallets for trading, saving digital assets, getting loans or taking insurance, etc.
Differences of Defi From Current Financial System
Firstly, you hold your money in your crypto wallet in decentralized finance. Whereas banks, companies, or intermediaries hold your money for you in traditional finance.
Secondly, decentralized finance is open to everyone who can access the Internet. Restrictions are out of questions like nationality, political belief, gender or credit rating, etc. Especially, no permission from a third party is no need.
Thirdly, transaction activity is not required your identity. Freely someone can use DEFI applications without revealing their identity and personal information.
The market is always open, and you can trade without sticking to day or night time.
In DEFI, the transfer of funds is faster and cheaper than traditional finance. Transfers generally occur in minutes. It can take days in manual processes.
It ensures transparency through open smart contracts. Users analyze and track all user interactions for ensuring transparency. Anyone can look at a product’s data and inspect the system working.
It is programmable. It offers flexibility for encoding in the smart contract.
Interoperability is another characteristic of DEFI. Its tools can be operated together. Its services could utilize one another for developing new servers and products. DEFI is also applicable in banking services.
On the other hand, there are some challenges:
Since DEFI applications run on the blockchain risk of encountering error codes and hacking is possible.
Because of the anonymity, the developers and application owners swindle and disappear with funds.
Although its strong and developing background, DEFI still needs more technical infrastructure.
DEFI requires some heavy-duty computing. Maintaining a database and records across a network of many computers slows the process down. It sometimes makes the transaction more expensive. Blockchain application developers try to find ways to make it more scalable and faster.
How It Works?
DEFI offers a lot of tools for sending money, saving digital assets, lending, and borrowing. Anyone can send money with very cheap fees and without using intermediaries. So, sending money becomes as easy and fast as sending an email. And it is peer-to-peer.
DEFI ensures transactions via smart contracts easily. A smart contract can hold funds and can send them based on certain conditions. This is unchangeable when it is on, it runs as programmed.
If a contract is designed and programmed to send money from the first account to the second every first day of months, it is sent as long as the first account has enough funds. No one can change the contract. Any intermediaries or any governmental institution block it. The third part can not steal funds.
The Future Of Defi
Though money has a few thousand years of history, the global financial system is a hundred years old. Now humanity is on the edge of a quantum leap towards to metaverse. Along with all tools of the metaverse, decentralized finance has and will be a very important role. It will ensure a more democratic service for finance. DEFI space is gradually catching up with the traditional system. It is developing and getting stronger. It offers a faster, more secure, more open, and more democratic financial system.
After this short beginning about DEFI, we will discuss most popular DEFI applications, tools and platforms in the next posts.