Cryptocurrencies allow you to transfer money at any time to anyone and anywhere in the world. Decentralized finance, or Defi, takes it a step further by promising to make any financial service payments, mortgages, investments, insurance, etc accessible to everyone, without intermediaries. This new technology, which is still in its infancy, has the potential to transform the financial system.
What is decentralized finance
Decentralized finance is a system through which financial services become available on a public and decentralized blockchain network. This way, anyone is free to use them, without having to go through intermediaries such as banks or brokers. More specifically, Defi allows individuals to interact to carry out person-to-person financial transactions rather than through a financial intermediary. This is possible thanks to the so-called “smart contracts”. Smart contracts – or smart contracts – are programs that can be automatically executed when certain conditions are met. These contracts allow developers to build much more sophisticated functionality than just sending and receiving cryptocurrencies, through decentralized apps.
Defi apps already exist today that allow you to carry out various financial transactions including lending or borrowing money, creating a stable coin – cryptocurrency whose value is pegged to the dollar or even making investments.One of the best ways to see the potential of Defi is to understand the problems that exist in the banking system today.
What distinguishes Defi from the traditional financial system?
Transactions performed on a Defi application are not handled by an institution such as a bank but are written in a smart contract. Once the smart contract is deployed on the blockchain, Defi apps can run on their own, without any human intervention.
Here are some of the main differences between Defi and the traditional banking system:
- Money transfers with Cardano DEX happen in minutes
- The market is always open, every day at all hours
- Each individual can decide who to lend their money to
- Transactions are anonymous
- Normal wire transfers take at least one day
- The market is open Monday to Friday during business hours
- The bank decides who to lend the savers’ money to
- Each transaction is associated with the identity of the individuals involved
The current state of Defi
We are still in the early days of this new technology that promises to transform the financial system. To make this happen, however, there are several problems to be solved. For example, with the ever-changing infrastructure, DeFi’s app scams aren’t uncommon.