Many experts advise that when you want to understand what DeFi, or Decentralized Finance, is, then it is necessary that you keep aside your knowledge about traditional banking. For, they argue, DeFi is bringing about disruptive changes in the way we handle money. In the first instance, it is making the role of banks and financial services institutions redundant. Then, there is no need for any regulations or regulators in their current definitions. Thirdly and most importantly, it is users who are in control of their money. And the whole ecosystem is claimed to be most secure and transparent. An Utopian fantasy?
Really not. DeFi has come to stay and it is kicking too.
BLOCKCHAIN-BASED
DeFi is very much linked to blockchain, or distributed ledger technology. In fact, it is the basic building block of DeFi in maintaining transaction records. The other aspects are tokens, which constitute digital assets, and smart contracts that facilitate process automation.
DeFi is also linked to cryptocurrency Bitcoin. But, Bitcoin’s disadvantages of wild price fluctuations and very high transaction costs led to the development of stablecoin, which offered the benefits of highly decentralized digital asset. So, stablecoin as digital assets and smart contracts combined led to the development of decentralized applications, or dApps, and decentralized exchanges, or DEXs. DEXs are today highly developed and the basis for DeFi. DeFi platforms can do mass-scale trading in cryptocurrencies without the presence of any central exchanges.
SIGNIFICANT ADVANTAGES
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