The DeFi’s Promise to The Future of Finance

What Is Decentralized Finance (DeFi)?

Decentralized Finance (DeFi) is a financial system where people control their funds and the economy at large.

Difference between centralized and decentralized lending
DeFi — Key matrices

How Does Decentralized Finance Work?

In traditional Finance (TradFi), tangible assets are used as collateral to obtain loans from commercial banks and lending apps.

How DeFi work?

Layers of Decentralized Finance

Decentralized Finance comprises five layers, all of which stack on each other.

Courtesy: Research gate

3 Ways Decentralized Finance Solves The Weakness of Traditional Economy:

Now, what are some of the ways decentralized Finance improves over traditional Finance?

1. Efficiency

One of the core promises of DeFi is to provide a seamless financial system that handles large volume transactions efficiently.

  1. Effective Remittance: DeFi plans to achieve an efficient financial system by fostering quick and frictionless remittance. Presently, cross-border transfers cost an arm and leg and are incredibly tedious. In Defi, transactions are processed on the blockchain, and fund transfer takes seconds to attract a ridiculously cheap fee.
  2. Remedy Information Asymmetry: The information gap is another abnormality that undermines the present financial system. This is because some classes of people have better access to information, leaving room for exploitation. DeFi is non-discriminatory, and the code doesn’t care about wealth or class. Codes are open source, transaction records are public, and decisions are collectively made among protocol members, so everyone gets timely information and removes the room for exploits.
  3. Better Incentive: Rewards are pretty distributed in a decentralized protocol. Therefore, everyone from validators, liquidity providers, and users is fairly rewarded based on their contribution.

2. Huge Rewards

A significant concern in traditional Finance is the inequality in how revenue is shared.

  1. Yield Farming: Instead of leaving assets idle in a wallet, crypto investors can deposit or lock their coins using a decentralized exchange or lending protocol to earn more crypto. Yield farming rewards can be in the same crypto locked or another valuable token and are calculated yearly.
  2. Initial Decentralized Offering (IDO): This form of yield farming enables users to contribute to an upcoming project. They buy in on the project token at the fairest possible price. The initial decentralized offering is almost similar to the initial coin and exchange offerings, only that this fundraising method is more secure and trustless.
  • Collective decision-making and transparent voting system that makes it difficult for the member to copy/edit code to create duplicate
  • Open source code that makes it easy for the member to audit project smart contact
  • Decentralized autonomous organizations (DAO) where code acts as the law and the smart contacts determine the rule of operation.

3. Interoperability

Many traditional finance products have complex integration. For instance, storing dollars in a Euro account is impossible, and currency conversion fees are exorbitant.

The Future of Decentralized Finance (DeFi)

Decentralized Finance has grown in leaps and bounds in the last few years. The amount of money locked across the decentralized ecosystem “TVL” has grown from $6.9b to $11.1b in August alone.

Conclusion

The future of Finance is relatively unclear. But early signs show that it is gradually gaining popularity. That’s not to say that DeFi isn’t without its concerns.

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Afzal Ibrahim

Afzal Ibrahim

Tech, Design, and Art — love’em all. Curator at theartist.me