DeFi represents the infrastructure such as lending platforms and exchanges required to innovate upon the traditional financial systems. It is a broad term for various financial applications that utilise cryptocurrency or blockchain technology to solve problems that exist within the traditional financial system
Decentralised finance (DeFi)refers to the shift from traditional centralised financial systems to peer-to-peer finance enabled by decentralised technologies built on the Ethereum blockchain − From lending and borrowing platforms to stable coins, real-time trading of any tokens and derivatives, prediction markets and use of synthetic assets for hedging.
I have worked in the financial markets for 30 years and the amount of innovation taking place in DeFi has never been seen before. Therefore, this is something I would like everyone to take notice. This technology does not require human intervention. it is fast and efficient and is able to look for opportunities where returns on investments can be achieved at minimum costs and friction.
This is the technology that will provide access to financial services to the millions of individuals that are currently underbanked.
Benefits of DeFi
Decentralised finance leverages key principles of the Ethereum blockchain to increase financial security and transparency, unlock liquidity and growth opportunities, and support an integrated and standardised economic system.
- Programmability Highly programmable smart contracts automate execution and enable the creation of new financial instruments and digital assets.
- Immutability Tamper-proof data coordination across a blockchain’s decentralised architecture increases security and auditability.
- Interoperability Ethereum’s composable software stack ensures that DeFi protocols and applications are built to integrate and complement one another. With DeFi, developers and product teams have the flexibility to build on top of existing protocols, customise interfaces, and integrate third-party applications. For this reason, people often call DeFi protocols ‘money legos’.
- Transparency On the public Ethereum blockchain, every transaction is broadcast to and verified by other users on the network. This level of transparency around transaction data not only allows for rich data analysis but also ensures that network activity is available to any user. Ethereum and the DeFi protocols running on it are also built with open-source code that is available for anyone to view, audit and build upon.
- Pseudonymous Users do not need to reveal their identity.
- Permissionless Unlike traditional finance, DeFi is defined by its open, permissionless access: anyone with a crypto wallet and an Internet connection, regardless of their geography and often without any minimum amount of funds required, can access DeFi applications built on Ethereum.
- Self-custody By using Web3 wallets like MetaMask to interact with permissionless financial applications and protocols, DeFi market participants always keep custody of their assets and control of their personal data.
An example of DeFi is of money markets instruments that are created with algorithmically derived interest rates based on supply and demand.
Other DeFi projects include decentralised exchanges that allow users to trade without brokers and protocols for lending that do not involve loan officers or credit committees. DeFi products can allow savers to stop shopping around for the best interest rates by having algorithms do this for them. They can also end discrimination against certain borrowers by having software make credit decisions. They could even eliminate the risk of fraud or corruption by no longer being run by humans.