Decentralized Finance, which is more commonly known as DeFi throughout the industry, is an experimental form of finance that does not require the use of financial intermediaries such as banks and exchanges. This method, therefore, allows users to use blockchain networks, which are famously used for virtual currencies from the cryptocurrency world.
Whilst it is still a technology that can be considered rather foreign to many who do not actively look into it, cryptocurrency has been on the rise and continues to show significant changes throughout 2021; with it likely to continue to show growth in the years to come.
The established financial infrastructure upon which the world depends for its commercial activity is invariably controlled by banks, governments, and regulators. Decentralized finance – or DeFi for short – aims to upend all that by creating an open, accessible, and all-inclusive network of services, which can authorize and enforce transactions without the need for banks or regulators.
This is all possible due to the advent of smart contracts, which are self-enforcing digital contracts that incorporate the terms and conditions agreed upon by both borrowers and lenders into their code. This code is then made-open access, ensuring everyone around the world can see and participate in its chain of transactions.
It’s an unpleasant but unavoidable fact that the world is run by the elite – and nowhere more so than among the financial sectors. DeFi aims to bring low-income communities into the fold by lowering the barriers to their participation in financial transactions and allowing them to access credit that they could not normally dream of.
That’s especially true on crypto lending platforms like SmartCredit.io, where loans are available with low collateral ratios and with a wide variety of collateral types accepted. In this way, DeFi – and, by extension, SmartCredit.io – are making the world of finance more accessible to the masses.
Advantages of DeFi
One of the major factors as to why DeFi has become incredibly popular with many is down to the advantages that it provides those who use it. There are a number of big advantages, including the continued rise of various cryptocurrencies, as well as the lack of centralization.
Centralized finance operates upon the principle that the banks (and other major financial institutions) hold all the cards – including the capital itself. This gives them an unassailably strong bargaining position and allows them to dictate the terms and conditions of any accounts, loans or other services they offer.
With DeFi, the middleman has been removed from the equation. That means the individual can control their assets with greater autonomy than ever before, specifying the terms of any arrangements they make and reaping the benefits incurred without a third party siphoning off the lion’s share of the profits.
Lack of Centralization
With the lack of centralization being involved, this gives users the freedom to make transactions without the need for any external interference, thus allowing them to effectively do what they want with the money that they own. In addition, users will be able to make near-instant peer to peer transactions, therefore making it a truly global currency and one that can be used anywhere. A lack of centralization also means that DeFi can be a lot safer and even more difficult for hackers to try and attack and steal information and financial data.
Accessibility and Control
Further advantages include financial sovereignty, which means users will be able to have democratic control over their finances, thus being able to make their own decisions and not face any interference. Accessibility is of the highest level, as well, as an internet connection is the only thing that is really required to access to the blockchain system.
Now, it might seem counterintuitive to suggest that centralized finance isn’t secure. While the funds you deposit into your bank account are insured up to a certain point – in the USA, for example, the Federal Deposit Insurance Corporation safeguards sums of up to $250,000 – it cannot be ignored that banks and their ilk have been heavily involved in every major economic crisis, including the most recent one in 2007.
DeFi aims to preclude the possibility of a similar crash happening again by taking the power to instigate such catastrophic events out of the hands of massive corporations. In fact, the self-regulated, the self-enforced nature of Blockchain technology means that it’s theoretically impossible for anyone to do damage on a similar scale as has been wreaked by banks in the past. That self-same technology is also protected with ironclad cybersecurity to prevent hackers from stealing from or defrauding DeFi users.
With a whole host of benefits that outstrip those offered by centralized finance, it seems as though it’s only a matter of time before DeFi usurps the existing infrastructure put in place by corporate and financial elites and revolutionizes the way we think about money in the future.