Decentralized Finance (DeFi) is an ecosystem of Decentralized financial applications that are backed by Crypto payments. Generally, it is built on Smart Contract- Blockchain Technology, which means that people can execute financial activities without passing through an intermediary, using open blockchain networks.
DeFi has the potential to replace every existing financial service such as lending and borrowing without a bank. Most of DeFi coins use Decentralized Finance to find lenders and borrowers and to connect them. The lenders can receive interest in lending their coins. This is done by a smart contract, which is mostly running on the Ethereum network.
Another of the focuses of the DeFi space is to build exchanges where users can buy and sell their cryptocurrencies easily, without the need for any central platform. DeFi trade exchanges will link buyers with the sellers, and the interesting part which will benefit both parties is the fact that due to the removal of the middle party, both parties will not have to pay any fees, as they did in centralized economic systems.
There are five major impacts that DeFi can help to shape the global financial system for the better:
1. Wider global access to financial services.
There are 1.7 billion citizens of the world who remain unbanked and have zero access to a financial institution. With decentralized finance, anyone with an internet connection and a smartphone could access financial services.
2. Affordable Cross Border Payments
Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population. DeFi services are predicted to lower the average global remittance fee from its current 7% to below 3% on average.
3. Improved Privacy and Security
In decentralized finance, users have custody of their wealth and can transact securely without validation and breach possibility from a central party.
4. Censorship resistant transactions
In a full DeFi system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations. Users can divest to the decentralized financial system to protect their wealth from manipulation and hyperinflation.
5. Simple apps
Developers of DeFi applications will focus on creating apps that allow people to intuitively use decentralized financial services without the complexity of the centralized system.
In the future, we expect that the crypto ecosystem will be the portal to all your digital asset activity, just like an internet browser today is your portal to the world’s news and information. Imagine a dashboard that shows you not just what assets you own, but how much you have locked up in different open finance protocols–loans, pools, and insurance contracts. We’ve already seen asset issuance and exchange, borrowing, lending, and derivatives built for crypto. What’s next?
Source: www.blockchain-council.org, www.cryptotips.eu