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What is DeFi?
DeFi, short for Decentralized Finance, can be defined as various financial applications and services on the blockchain by using a peer-to-peer finance system to provide financial services that the traditional banking system offers, such as savings, borrowing, and lending. The idea that influences the development of DeFi is to make financial products available to everyone and facilitate a permissionless financial service ecosystem without having to go through an intermediary like banks or brokerages.
In the traditional financial system, users have to depend on banks, brokerages for financial services. It is necessary to provide a government-issued ID, Social Security number, or proof of identity when opening a bank account to use their services. This gives the centralized entities complete control over the entire financial system.
DeFi, on the other hand, makes it possible for anyone to buy, sell, lend and make a financial transaction without having to pay any unnecessary fees and go through an institution that is providing the financial services. With blockchain and DeFi, people are no longer have to go through any third party to make a financial transaction.
According to research, out of approximately 72 million adults worldwide, over 50 million individuals do not have access to a bank or similar financial services. Aside from not having enough money, one of the reasons contributing to this is the complications in the current banking system. Not only that, the lack of transparency in the current centralized financial system influences people's judgment when considering financing options.
(Source: Merchant Machine, 2021)
DeFi is decentralized in a way that each and every one of the transactions are made on a blockchain. This means that everybody on the blockchain can access the transaction, and no one entity has the power to control the system.
As a blockchain system is built by connecting nodes, it allows DeFi to have absolute transparency where everyone can see and audit. While all transactions are transparent, the user's identity is made anonymous using the code in the blockchain.
Since anyone can participate and use DeFi apps, users can make transactions directly without having to go through any financial institution, which makes DeFi permissionless.
As the DeFi development progresses, applications can be built by combining other DeFi products. Nowadays, DeFi applications are not limited to money transfers, but many applications and products can be created into something completely new.
How Can We Benefits from DeFi:
When we talk about DeFi and blockchain, some might think it is only meant to trade cryptocurrencies. The truth is DeFi encompasses anything from asset trading, financial services, gaming, NFTs, and even prediction platforms like sports, economics, and election results. Let's take a look at several main applications of DeFi that we can take advantage of.
- Allows to buy, sell, transfer, stake and earn interest on digital assets
2.Compliance and KYT:
- Offers Know-Your-Transaction (KYT) that tracks transaction behaviors instead of user identity
3.Analytics and Risk Management:
- Helps to analyze data for risk assessment and reduction
4.Derivatives and Synthetic Assets:
- Allows the creation of tokenized derivatives with added security
- Offers the tools to develop, integrate, and compile blockchain solutions
- Offers portable self-sovereign identity that is secured and private
- Provides automated insurance claims, secured audits, and reduces paperwork
8.P2P Borrowing and Lending:
- Ensures pee-to-peer lending and borrowing with high-interest rates and low risks
- Offers faster, safer, and more transparent solutions compared to the legacy payment systems
- Decentralized administrative entities that manage the core financial operations
The innovation of blockchain technologies opened the new possibility of a global financial system that is not controlled by a single entity. As the DeFi innovation continues to grow, we also see many new projects and products being developed. Now that we have a basic understanding of DeFi, we will discuss some of the most notable DeFi projects in the next part of the MCS DeFi Series.
Stay tuned and see you again next week!
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