In the last few years, people have seen rapid growth and development of different cryptocurrencies. Not long ago, digital currencies like Bitcoin and Binance Coin climbed up to great heights in the world of cryptocurrency. Besides that, there have been massive investments in blockchain tokens, currencies, and ventures. Nowadays, there is a buzz about this new form of finance that is almost impossible to ignore. It is DeFi – short-term for Decentralized Finance – the next step that is playing a vital role in the revolution of disruptive financial technology.
But What DeFi Is Exactly?
Decentralized Finance, also commonly known as DeFi, is a blockchain-based financial system that doesn’t rely on any central financial authority. It is a financial service that uses smart contracts that are automated enforceable agreements. They don’t need mediators such as a bank or a lawyer. Instead, it uses the online blockchain technology that allows the users to exchange, swap, lend or borrow their assets securely without the involvement of a third party.
Trading cryptocurrencies have been existing for more than a decade now. But, what makes DeFi different from the others is that it expands the use of blockchain technology from just a simple value transfer to much complex financial use cases.
With the help of technology, decentralized finance disintegrates the centralized models. It then enables the provisioning of all the financial services anywhere around the world for almost anyone. Its services and apps are built on public blockchains that either offers new services that are custom designed in the DeFi ecosystem or replicate the already existing offerings. DeFi applications offer their users more control over their money with the help of trading services as well as personal wallets that cater to the needs of individual users.
Why Is It So Popular?
DeFi has been facilitating people with the financial freedom they always wanted. It provides investors the tools that they need to protect their wealth from difficult capital controls. Also, DeFi makes the payment process fast, simple, and more economical as compared to the other digital assets available, that also even without KYC. There are no restrictions related to wealth, religion, or social status in DeFi. It means that everyone can take part in it whether you are a professional investor or a normal person with the right funds. It is a cherry on top for the people who can’t get access to traditional unsecured lending. This is because some people lack the formal documentation that they need in order to take part in it.
Secondly, in traditional lending, there is a legal demand that both the lender and borrower should know each other’s identities. The lenders can also evaluate whether the borrower can repay the debt or not. However, this is not the case in DeFi. In DeFi, everything is about maintaining the privacy and mutual trust between both parties.
Yet another thing that makes DeFi such a craze among people is the rise of stablecoins. They are the cryptocurrencies whose value is fixed with an outside asset or external references to stabilize their price. This may include gold or the US dollar. However, they are not always stable. Another inevitable reason for this DeFi surge is that a lot of common players are getting involved with it. Several financial institutions have started to accept DeFi and they are finding ways to actively participate in it. For example, 75 of the world’s biggest banks are starting to take this very seriously. Even COVID-19 is a major reason since it has driven global interest rates much lower. This is the reason why DeFi is offering much higher returns to all the savers rather than to the high-street institutions.
Finally, one of the most important reasons for its popularity and people putting their money into DeFi tokens is their fear of missing out from the overall explosive growth. There is a lot of irrational enthusiasm in people considering DeFi tokens. This is because a lot of tokens are worth nothing in practical terms.
Whether you like it or not but we are surely heading towards a new and different financial system. It is more decentralized than before. The main point to focus on here is how we can best guide its development so that it will be able to both minimize all the potential risks and will spread the benefits as broadly as possible. This will be the challenge in the cryptocurrency market for the next few coming years.