Blockchain Technology has disrupted the financial sector in recent years, DEFI or decentralised finance has become the buzzword for some time now. Investors have been putting their money behind this and much capital has been channelled into these sorts of technology. Rapidly gaining speed are the non-centralised digital infrastructures of the kind. These are of a nascent sort and many still are sceptical about this development, non-readiness of a central power to give it a kind of base has made its extension still more difficult but even then numerous digital assimilations of the kind are not very uncommon. We will now analyse its structure, its content, its development and so on. In addition block chain technology would also be touched, its relationship with DEFI would also be briefly discussed.
Blockchain- Before starting out in the actual systems and its relationship we must know the essentials. Block chain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Typically managed by a peer to peer(P2P) computer network for use as a public distributed ledger. Decentralised, distributed, and often public, digital ledger consisting of records called blocks that are used to record transactions across many computers. Additionally the blockchain database is managed autonomously using a Peer to Peer network and a distributed timestapping server. It is authenticated by mass collaboration and powered by collective self-interests.
DEFI or decentralised finance is an open and global financial system built for the Internet Age. Opaque, tightly controlled, and held together by decades-old infrastructure and processes. It offers a financial system without relying on intermediaries such as brokerages, exchanges or banks by using smart contracts on a blockchain. And additionally it allows people to lend or borrow, speculate on price movements on assets using derivatives, trade crypto currencies, insure against risks and earn interest in savings-like accounts.
DEFI revolves around decentralised apps, also known as DApps, that perform financial functions on distributed ledgers called blockchains, made popular by Bitcoin and has since been adapted more broadly. So the transactions take place not by centralised intermediaries such as a cryptocurrency exchange or a traditional securities exchange, transactions in fact are directly made between participants, meditated by smart contact programs. DEFI protocol, typically run using open-source software that is built and maintained by a community of developers.
The first entity that may be considered a DeFi platform was MakerDAO (the term DAO signifying “Decentralised Autonomous Organisation”). It led to freer exchange among cryptocurrencies for participants. A DeFi example is that of Uniswap, which represents a decentralised exchange premised on forming large liquidity pools for the purposes of swapping tokens. Built on the Ethereum blockchain, Uniswap serves as an exchange for hundreds of Ethereum-based digital tokens and its algorithm creates dynamic incentive structures for users to form liquidity pools by compensating them for trading fees. There is one problem though. Uniswap cannot assume responsibility for the identities of user participants in a way that a crypto exchange that is compliant with traditional laws might. The advantages of DeFi are many. First is that it is permissionless, this allows one to engage with DeFi without having to ask for permission to send a remittance, get a loan, or send an online payment. Nearly anyone can access DeFi alternatives to these services with only an internet connection, a crypto wallet, and a smartphone (or computer). This allows you to then send permissionless payments via a variety of blockchain protocols to anyone in the world. Further, this permissionless extends to both borrowing and lending. If one has a crypto, you don’t need a bank to get a loan. You can deposit your crypto to immediately get a crypto-collateralized loan through a DeFi protocol that can be paid to you in stable coins (which can be exchanged for fiat currency if needed). Once the loan is repaid, you get your crypto back automatically. You can also trade your crypto and stablecoins via a decentralised exchange(DEX) in a permissionless fashion. DeFi allows for anonymous or pseudonymous online financial transactions. For its supporters, having online financial privacy is a key human right. As an alternative to fiat and legacy payment networks, DeFi allows individuals to be in full control of their finances. While a standard remittance can take days, a crypto payment typically takes from mere seconds to just a few minutes. Censorship resistance is the special enabled feature. As permission from a third party isn’t required, in concert with the optional privacy, financial censorship measures are largely diminished and less enforceable. Beyond this, the censorship resistance of DeFi also allows for robust payment networks with little-to-no down time (depending on the blockchain). Even major credit card networks have intermittent outages that can wreak havoc on developed areas and economies that need online payment functionality or eschew physical cash payments.
As has been mentioned above, one need not trust a financial institution or an individual to safeguard your finances. More importantly, the DeFi protocol allows you to fully control your assets so there is no need to trust an intermediary, third party, or a financial custodian. This removed the counterparty risk that has plagued both TradFi and centralised crypto exchanges (CEXs) and services.
Another notable benefit of the DeFi ecosystem is how it is opening up access to key financial services for those in underserved regions or developing countries. Moreover DeFi solutions are enabling the unbanned to access crypto payments, crypto savings accounts, collateralized loans, and other DeFi products.
Issues Concerning DeFi
Microeconomic issues related to DeFi platforms that require attention too are there. DeFi systems are built on open source code, which allows for numerous versions of the same platform to be launched by competing users. Additionally, there are very real risks of malfeasance, which range from the worrying (hacks, manipulation) to the downright abhorrent (terrorist finance, money laundering). Coding errors and hacks are common in DeFi. Transactions are irreversible which means that an incorrect or fraudulent DeFi transaction cannot be corrected easily. For example in 2021, half of crypto currency crime was related to DeFi. The incompetence of developers and added to it the non-existent or poorly enforced regulation.
Conclusion
DeFi has expanded considerably in recent times. 2020, which may be seen as the year of DeFi in many respects, more than $11 billion was “invested” or infused into the DeFi instruments. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms. All in all the pros and cons of DeFi and Blockchain are yet to come out more broadly. It is an emerging technology plus its variants and fluctuations when intermixed with the environment are quite interesting. The readiness with which the technology is being adopted by the entrepreneurs is quite astounding. Many startups have already started the work on it and many more still are to come.