If you look at the financial structure today, you will notice that there are many intermediaries involved who function as guarantors of transactions. These institutions wield enormous power because your money passes through them. However still, many people around the world lack access to bank accounts. DeFi eliminates the necessity for financial transactions to be approved by the Central Bank or Government Agency.
DeFi uses smart contracts to provide services that don’t need intermediaries. A smart contract is a sort of Ethereum account that can retain funds and send/refund them based on specified criteria; no one can change the smart contract during its lifetime; it will always run as planned. Decentralized Finance (DeFi) is a new monetary system based on distributed ledgers that are equivalent to those used by cryptocurrencies.
Imagine lending (you can lend your cryptocurrencies and earn interest without any problems), receiving a loan immediately, and purchasing derivatives on stock options and futures contracts.
The marketplaces are always open with DeFi, and there is no centralized authority that may prevent payment or refuse access to anything.
DeFi vs Traditional Finance
| DeFi | Traditional Finance |
| You are in possession of your funds. | Companies are the custodians of your funds. |
| You have complete control over where and how your money is spent. | You must trust companies not to mismanage your funds, such as by lending to high-risk borrowers. |
| Fund transfers take only a few minutes. | Owing to manual processes, payments can take several days. |
| Transactions are done under a pseudonym. | Your financial activity is strongly intertwined with your identity. |
| DeFi is open to everyone. | For using financial services, you must first apply. |
| The markets are constantly open. | Markets close because workers require rest. |
| It is based on transparency — anyone may analyze a product’s data and explore how the system works. | Not accessible to everyone. |
- Receive/ Transfer money from/to anyone: You can send and receive money to and from anyone in the world using Defi, but both parties must have a wallet for the transaction to take place. You’ll need to enter the receiver’s account address from your wallet, and your payment will be sent directly to them; it’s just like sending money from your pocket to theirs.
- Payment Solutions: DEFI can assist with payment automation. You may pay your employee’s wages, rent your home, scooter, and so on using DeFi apps. If you’re worried about cryptocurrencies’ price volatility, there are stable coins as well. For example, USDT – which are pegged to US Dollars.
- Store of Value/ Inflation Hedge: People in various parts of the world are affected by hyperinflation, which indicates that the purchase value of the local currency is decreasing. You could buy less or none of the things with the same amount of money that you could buy them earlier. This problem is solved by holding a stable cryptocurrency like USDT, which gets its value from a relatively steady fiat currency like the US Dollar.
- Borrowing: If you visit a bank or financial institution for a loan in the traditional context, they will verify your identity and evaluate your credibility before providing you with a loan. Either party doesn’t need to divulge their identity when using decentralized lending. Instead, the borrower must put up collateral, which the lender will obtain immediately if the loan is not repaid; additionally, you will have access to Global Funds held by your preferred banks or financial institutions.
- Lending: Not only can you borrow money, but you can also earn interest on your cryptocurrency by lending it. You can witness your fund grow in real-time.
- Fund your ideas: Crowdfunding can be a godsend for start-ups in their early stages of development, and it can be done on the Ethereum platform. You’ll have access to a sizable pool of funds as well as possible investors from all over the world.
- Insurance: With increased automation, coverage is more affordable, and payouts are faster; Decentralized Insurance seeks to make insurance cheaper, faster payout, and more transparent.
Currently, it is in a very nascent age and we might see insurances provided by these apps for anything that is currently available in the market like a vehicle, crops, etc.
Written by: CA Suraj Kar
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