What is DeFi?
DeFi is the buzz word for the term Decentralized Finance. It can be understood as a hypernym for the part of the Crypto World that aims towards building new digital financial infrastructure using cryptocurrencies.
It is an amazing technology that might give a new turn to our future projections. This would actually put an end to the traditional trust mechanism. Therefore, it indirectly raises a question on the need of age old intermediaries like government agencies and banks to carry out a monetary transaction and calls out for their replacement.
DeFi is deeply rooted in the blockchain technology. Blockchain is a type of online ledger of all the transactions in digital currency or assets. This ledger is updated and maintained across several computers or nodes, connected to each other via peer to peer network.
The key trust accumulating feature of a blockchain technology is that it is immutable. This implies that no single individual can alter, replace or change the entries of the digital ledger.
How does DEFI differ from Traditional Monetary System?
In traditional monetary system, all parties or individuals involved in transaction of money trusted the banks or other government agencies.
But in DeFi, the intermediary trust mechanism is replaced by digital trust mechanism. The ‘smart contracts’ built on blockchain settle trades make markets. Alongwith this, DeFi also has other dimensions like prediction markets, options, derivatives and lending platforms.
How does DEFI differ from BITCOIN?
Bitcoin (or Altcoins) is a Decentralized digital currency which possesses a value that keeps on changing as per the market movements. DeFi, on the other hand refers to financial services that equpis the investors to borrow loans against their cryptocurrency, earn interests, etc.
Financial Services by DeFi
• Lending – Investors can lend out their cryptocurrency and earn interest. The interest is payable per minutes rather than per month per annum
• Borrowing – One can easily receive loans against their cryptocurrency. The process is so instant that it is often called as Flash Loans.
• Trading – With this feature, one can trade peer-to-peer without engaging any broker services 24X7. With DeFi services, users can send and receive money instantly at a very nominal expense.
• Saving cryptocurrency – The investors can store Crypto assets in crypto wallets and earn more interest than a saving bank account
• Derivatives Trading – It allows users to trade in options and futures contracts.
Popular DeFi Services
One can easily avail DeFi services on the Ethereum network, the second-largest cryptocurrency after Bitcoin. Ethereum also allows other blockchain apps to be built on it. By using the functionality decentralized apps (or Dapps) on Ethereum, investors can exchange, lend and borrow crypto assets without incurring any involvement or cost on intermediaries. Apart from Ethereum, there are many upcoming DeFi platforms.
Some of the top rated DeFi services include:
• Uniswap – This finance Dapp lets you swap your tokens with other people across the network easily.
• Terra – It is a rapidly growing DeFi tool kit built on Cosmos and is the second-largest ecosystem after Ethereum.
• Decentraland –It allows you to invest in the MetaVerse through the MANA Token
• Yearn.finance – It is a group of protocols on the Ethereum blockchain that permits users to optimize their earnings on crypto assets through Decentralized lending agreements
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• Dark Forest – It is a gaming service on Dapps at Ethereum The users can play against others to conquer planets.
• Cosmos – It is a top-rated cross-chain Defi Coin Protocol. It allows you to manage crypto assets across multiple chains. Cosmos offers services that include swap, transfer, and pool assets with Emeris.
The Limiting Side
Absence of know-your-client (KYC) can restrict financial institutions to adopt DeFi. If the institutions instruct for mandatory KYC requirements then will be forcing DeFi to become a centralized platform.
Government regulations to slow the pace of the growth witnessed in Decentralized Finance Services may prove to be another obstacle in the way.
Vulnerable to Hacks
Coding errors and hacks are common in DeFi as the transactions made on Blockchain are irreversible. As a result, any incorrect or fraudulent DeFi transaction cannot be corrected easily. For example, in 2020, Yam Finance accepted deposits equivalent to $750 million within days of its launch before crashing because of a coding error.
The nouveau investors are at high risk of losing money because of the complex interaction procedure at DeFi platforms. Moreover, there is no provision of any helpline with customer support.
The person behind a certain DeFi protocol may be anonymous, and may disappear with the money of the users.
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