There’s no doubt that the rise of the blockchain and cryptocurrency has been one of the most significant financial frontiers of the modern age. Cryptocurrencies have massively disrupted traditional financial models and become incredibly important in everything from business to investment to transactions.
Cryptocurrency continues to spread across the world, growing all the time and finding new ways to provide investment returns and value to adopters. From the exchange of Bitcoin to the rise and fall of the PancakeSwap price, crypto is a frontier unlike anything seen before.
The most significant quality that cryptocurrency has that sets it apart from more traditional financial models is that it is decentralised. Blockchain based currencies don’t rely on central authorities or intermediaries. One of the areas where this benefit is being seen most strongly is in the financial services industry. This is known as decentralised finance, or DeFi. But what is DeFi? Why is it important and what benefits can it provide? In this article, we are going to explore decentralised finance and discuss the various benefits, not to mention potential drawbacks, that it might pose.
What is DeFi?
In traditional financial models, transactions are almost always conducted using intermediaries. Banks, credit card companies, you name it. However, with public blockchain networks like Ethereum function differently. Instead of having to deal with intermediaries, peer-to-peer transactions are executed programmatically based on pieces of code that are deployed and executed on the blockchain. Applications built on this principle are called decentralised applications or ‘dapps.’ DeFi services are dapps that use the decentralised nature of public blockchains to offer financial services to people all over the globe with far more accessibility.
This includes services such as:
- Lending and borrowing
Essentially, DeFi allows you to do most of the things that would usually be supported by your bank.
Why DeFi matters
DeFi is essentially the next step of the idea first established by cryptocurrency. Where crypto was based on the premise of digital currency, DeFi is essentially a digital alternative to Wall Street. The difference is that it doesn’t rely on the same structures and expenses that Wall Street does. DeFi doesn’t rely on bankers being paid huge salaries or trading floors in giant office buildings. This means that DeFi offers the possibility for far more open, free and, most importantly, fair financial markets. You don’t have to be a Wall Street tycoon to benefit from DeFi, you just have to be connected to the internet.
The first and most significant benefit of DeFi is its accessibility. You don’t need to apply for an account. You are provided access to the digital marketplace simply by creating a wallet. Not only that but, because it’s entirely online, you don’t need to provide any personal information, allowing you to protect your data far more effectively. While your data is protected, you’re offered far more transparency when it comes to seeing a full set of transactions. Private companies will very rarely provide that kind of accessibility when it comes to financial transactions.
With traditional financial services, it’s often very difficult to move your assets around. You have to get permission from your bank or other lender to do something with your own money and assets. With DeFi, you can move your assets any time for any reason. You don’t have to pay any fees and you certainly don’t have to wait for long transfers to finish. In fact, the speed to DeFi is one of its biggest benefits. Things like rewards and interest rates update far more rapidly online, rather than the slow updates that occur with traditional financial services.
How it works
As previously mentioned, DeFi is something that is typically accessed by users through dapps, decentralised applications. The majority of dapps currently run on the Ethereum blockchain. Think of it much like interacting with a bank, the biggest difference being that you don’t have to open an account or deal with filling in any applications.
With DeFi, you can:
- Obtain loans quickly and easily without dealing with annoying red tape. These can even include the kinds of short term loans that most banks aren’t going to offer.
- You lend out your crypto, which allows you to earn interest on that lending.
- Trade crypto assets in much the same way that you would buy and sell stocks.
- Place your crypto into alternatives to a savings account that provides incredibly competitive interest rates.
As exciting as it is, there are a few drawbacks to DeFi. The majority of these tend to arise from the fact that this is all incredibly new tech and any new technology is going to experience certain teething issues. The degree to which transactions ranges on the Ethereum blockchain can fluctuate can sometimes increase the cost of active trading. It’s also important to remember that you are responsible for your own records when it comes to paying tax.
As with any method of financial investment, DeFi is not entirely risk free. But it’s an incredibly exciting frontier in the modern financial world that is only going to become more important over time.