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What is Decentralized Finance (DeFi)?

BitForex Editor
Aug 25, 2020

Since its inception, the major aim of Cryptocurrency has been to ensure that payments, monetary funds, and transactions are made available to everyone regardless of the individual location. Early iterations of cryptocurrency included amongst its offerings, a method of protected peer-to-peer trading that did not require middlemen like banks thereby decentralizing oversight and grating users complete management of their investments.

However, while this was unique and ground-breaking at the time, it did little to truly decentralize the financial system. The only processes that were decentralized were money disbursement and its depository. This meant that blockchain still had a lot of work to do with financial operations because most Cryptocurrencies were privy to access through exchanges that happened to be centralized access points. A myriad of crypto financial transactions was regulated through centralized companies that were either not transparent, lacked accountability, or both.

Now, this is where DeFi comes in. DeFi is what it is; Decentralized Finance. Its on-the-nose description is its own definition. Simply put, it  is an open alternative to most financial services currently being used. This spans from insurance, to savings and it comprises smart contracts, protocols, dApps and digital assets that are created on the blockchain.

The preferred platform of choice for DeFi at the moment is Ethereum however that doesn't mean it is the only blockchain platform that it can engage with.

DeFi is a decentralized and limitless financial landscape that enables you to create a myriad of financial services and tools that can be integrated, merged, and altered on any blockchain platform and according to your taste.

What is DeFi's USP?

Fintechs and Banks will claim that their customers are given control over their funds when the truth is that the customers' funds are still subject to the company's oversight. There is no true customer control over customer assets.

Decentralized Finance (DeFi) gives customers total control of whatever assets or funds they own through blockchain technology. At the moment, the developers of many Fintech firms are beginning to engage these open-source protocols for their apps. All the protocols on the ecosystem are open-source and this has enabled developers across the world to create various financial products. The trading, investment, and storage of assets in blockchain ensures customer or user security, and also ensures a much higher return on investment than other mainstream financing systems. You are the one handling your own investments and assets and thus you have complete control.

The benefits of DeFi

Security

While mainstream financial systems depend heavily on organizations such as banks to perform the task of middlemen, and government institutions of justice to carry out arbitration, DeFi requires none of these to function effectively. It has coding that stipulates the outcomes of any probable conflicts that may arise and its users are allotted complete control over their investments and funds. What this does is lessen the expenses that are normally attributed to the provision and use of commodities that allow for a seamless financial system.

When any financial service is activated over blockchain, it is listed on it and then transmitted over a myriad of nodes thereby ensuring that anyone who would try to either censor or cease a service would find it practically impossible.

Ease Of Access To All

An additional benefit of decentralized finance is how easy it is for new users to access it especially those who would have found it difficult to access other mainstream monetary services.

The problem it solves is simple.

The mainstream financial procedures depend on middlemen that only make profit when they function in high profile economic and geographical locations as such they hardly operate in communities with a modest economy. DeFi decreases the costs attached to financial services extensively and as a result, the communities are allowed access to a wider range of monetary services.

Uses of DeFi

Financial banking services

DeFi can be used for the allocation of mortgages, loans, insurance and stable coin. In recent times, there has been a focus on the creation of stablecoins. A stablecoin is a new class of cryptocurrency that offers stability of price and is often attached to an asset that exists physically in the real world but can easily be transferred from owner to buyer digitally and without any hurdles. Decentralized stablecoins present a situation where it can be repurposed as digital cash and not be subject to any centralized authority.

In the case of mortgages, the number of middlemen required for the traditional process increases cost and consumes time, smart contracts reduce these costs significantly and render the process seamless. Middlemen are also useless for Insurance on blockchain. Risk is shared amongst many users thereby resulting in significantly reduced premiums without a reduction in service quality.

Loan activities

Decentralized lending and borrowing of monetary units are a lot safer on this platform. The risk for lending is reduced because of the cryptographic verification procedures employed on the block chains which greatly reduces the trust required to perform operations. Loan activities cost are reduced, the process is quickened, and the service is made accessible to even more people.

The existing Issues with DeFi 

There is a substantial risk of users making errors because DeFi switches the responsibilities of the specialized middlemen to them. While this might be unsettling for some, it is not a major setback.
The ecosystem of the application can be cluttered thereby rendering the task of finding a specific application daunting. Developers are therefore burdened with not only creating applications but also predetermining how these applications can be seamlessly placed in the big picture of the Decentralized Financial ecosystem.
A major setback might be the issue of poor performance. Blockchains are known to be more sluggish than their traditional and centralized equivalents. This ultimately affects other applications that are hosted on them. Developers are tasked with considering the respective limitations of their products and optimizing them to fit their framework more seamlessly.

Final Note

While the DeFi ecosystem might appear, at first glance, to be smaller when compared to mainstream financial industries, it is on a rapid ascent. The goal of an open and completely decentralized global economic and financial ecosystem seems to only be feasible if our mainstream and traditional financial ecosystem is seamlessly interacting and operating with blockchain.

About BitForex:

BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.

BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

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