What is DeFi?
Short for Decentralized Finance, DeFi is a financial system operating without a centralized governing body that runs on digital applications writing smart contracts on different blockchains. To understand the DeFi system more clearly let’s start with the Centralized Financial System.
Centralized Financial System
A centralized financial system is the conventional finance system that runs on centralized platforms and is controlled by central governmental authorities. Almost all of our financial activities are being controlled by the central government financial institutions. These financial institutions in the shape of banks act as third parties have the power and authority to approve or deny transactions or withdrawals.
They can freeze your bank accounts, money transactions, or cash withdrawals until they are not satisfied with the transparency of the financial deals. Government financial regulatory bodies have also set some guidelines and rules for the financial dealings of citizens of their countries.
Now let’s get back to DeFi.
Decentralized Finance is a financial system operating on codes known as smart contracts created by the decentralized applications (dApps) that shape the infrastructure of the DeFi system being powered by blockchain technology. This gives a limitless possibility to the developers to come up with secure and customized financial protocols to produce new investment platforms for the public.
It is a financial ecosystem of decentralized apps that has given a big challenge and competition to the regular centrally governing financial system working mainly through banks. DeFi has the ability to create a transparent and open-source financial protocol that gives freedom of trading without any third-party involvement.
It is built upon blockchain technology like Ethereum blockchain offering the users to create their own cryptocurrencies and use their infrastructure to create unique smart contracts running different Decentralized apps.
The Future of DeFi.
Through the advancement of distributed ledger technology, we are witnessing a quantum leap in the new functionality of money. Everyone is invited to take a seat at the table where the world of decentralized finance is being created. Despite some of the inevitable difficulties that arise when working at the forefront of technology, the world of decentralized banking is on the rise. When the capacity to construct financial services is democratized, it’s impossible to forecast how this field will evolve over time. However, when DeFi and fintech intersect and integrate, we’ll reach a tipping point when fledgling financial technology becomes a component of a new financial system: one that represents the values of speed, security, accessibility, and equality.