What is Defi? What Everyone Needs to Know about Decentralized Finance
What is Defi? While the cryptocurrency market may rise and fall wildly within the space of mere hours, often worrying financial analysts, experts can agree that DeFi (Decentralized Finance) is consistent and here to stay. What DeFi has in common with crypto, of course, is that it was born on the blockchain. Public nodes — a network of computers that keep track of decentralized transactions — provide consumers with an opportunity to take control of their finances in ways that have not been possible in the past. The public ledgers that store DeFi data can be accessed anywhere in the world. This makes the world of finance more transparent than ever before.
No More Bank Runs: Why DeFi Is Changing the Banking Game for Good
Ever since banks were invented, certain aspects of traditional banking have been historically unsavory. One is the centralization of data. If a financial institution is hacked, for example, this can wreak havoc for weeks. After a hack, customers may find that their personal information has been compromised and sold to the highest bidder on the dark web. Also, they may discover that their funds are temporarily unavailable until the bank does its due diligence during business hours. With DeFi, however, this is not a concern. Public ledgers allow all transactions to be stored in a way that is truly secure. This keeps track of the money moving without storing users’ sensitive information in ways that can adversely affect them.
Why Blockchain Is Better
The verification process of blockchain technology ensures that each step of a transaction is processed smoothly. “Blocks” of verified data are encrypted and chained together to present a complete picture of a transaction. Each transaction carries within it the seed of the previous transactions. This leads all the way back to the “genesis” block that is the technological precursor to all the transactions that have followed. Because these transactions are verified over a number of nodes, there is no way that a bad actor can hack into the system and corrupt the historical data of the entire system by meddling with one node. By definition, the system is secure and open in a way that traditional banking has never been.
What Are dApps and How Can They Change the World?
dApps are decentralized applications that help to move the DeFi process along. If applying for a loan in the decentralized ecosystem, the person will use a dApp to submit their request. From there, the loan candidate will see which lenders may fill their requirements. All of the matching is done by algorithms, which is very interesting to those who believe that the current loan system can be highly biased. Many studies have been done that indicate people of a certain racial or socioeconomic background are more likely to receive loans from a traditional banking institution. Algorithms that are constructed well, however, do not discriminate. They allow both borrowers and lenders to find exactly what they need without prejudice.
Many people want to transform the planet, help third-world countries or others in undesirable traditional banking situations. Therefore, DeFi loans may serve as a true equalizer and game changer. In the eyes of these dApps, after all, the idea is that all applicants will have access to the financial tools that will help them to launch their businesses and thrive; with DeFi, these resources will no longer be closed off to the people who need them the most.
dApps Provide Users with Options
In the past, people were often limited to their local banks when applying for a loan. Through DeFi, borrowers can receive a loan from halfway around the world in the middle of the night. With excess fees and sky-high interest rates no longer playing a role in the equation, borrowers now possess the freedom to secure funds in a way that is fair and sustainable. After all, high interest rates can be a huge hindrance to fledgling business owners who are attempting valiantly to pay down their debt. DeFi has illuminated a true opportunity for equality to finally take root in the financial sector.
You Don’t Need a Bank Account with DeFi
Whether you’re purchasing stablecoins, which are crypto products that are tied to a federal currency — or you’re looking to avoid racking up major bank fees for a simple transaction — making use of DeFi is the answer. DeFi fans like that they do not need to set up a bank account that reveals their most private data. As long as they have access to the internet, they can play a valuable role in the decentralized finance community. In the financial world, institutions have often taken advantage of the people they serve. They do this by tacking on egregious fees for simple transactions.
With DeFi, the mission is to eliminate — or cut down substantially — on the number of fees someone will have to pay to move their funds from Point A to Point B. When users do pay fees, the currency is sent directly to the network, which supports the entire ecosystem. Essentially, DeFi cuts out the middleman to make financial transactions faster, cheaper, and more convenient.
In a world in which time has become perhaps the greatest commodity of all, many can see the value of a system that does not require its users to fill up their car with gas and go to a traditional bank then wait in line and experience days of delays while waiting for their transaction to go through. With DeFi, one merely needs to set up a digital wallet and then press a few buttons on their phone. Within a very short period of time — often less than a minute — their transaction is handled securely and conveniently.
When the Old Ways of Banking Can No Longer Serve Customers
Like any new technology, DeFi continues to redefine itself rapidly. The software and hardware programs needed are expanding at a fast clip, and many governments are at a loss for what to do when it comes to regulating DeFi. With fast growth, it is inevitable that regulators have not yet caught up with all the benefits of the system. This is why the prominent politicians who support broad financial reform are also the same people crusading against DeFi, which addresses many of the ills of the current system.
Some regulators have even posited that crypto and ICOs are no different that the traditional securities available on Wall Street. This is a kind of philosophy that possesses the ability to harm the entire blockchain world. The volatility of the crypto market is front page news most days, often to the detriment of the DeFi ecosystem at large. The wild dips and swings of the general crypto market are often attributed to new tokens and coins. These cryptos may or may not be sustainable in the long haul. With DeFi, the landscape is much less tumultuous.
What is Defi? A Promising Technology Poised to Define Web 3.0
In the future, it’s likely that people will marvel at how difficult banking was prior to the advent of DeFi. With so many advantages, the possibilities of DeFi are truly exciting and limitless. Allowing people to dream of their financial horizons like never before, these decentralized resources will catapult the planet into the future.
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