In recent years with the boom of Blockchain technology, many applications of blockchain will revolutionize our traditional systems. One of them is DeFi short for Decentralized Finance.
DeFi is a financial system built on top of blockchain technology. It is a peer-to-peer system that allows users to lend, trade, and borrow digital assets.
But What Is So Special About It?
DeFi applications are powered by smart contracts which automate financial transaction and helps in eliminating the need for intermediaries/third parties such as banks or other financial institutions that works as a bridge for the users and their assets. All the transactions made by the DeFi app are stored in a distributed database that is accessible across different locations.
All these efforts are just for users and to give more control and authority to users over their assets through personal wallets and trading services.
What Goes On Behind The Scenes?
As discussed that DeFi is built on top of the Blockchain so the Decentralize applications (Dapps) are used to handle all the transactions running on the blockchain.
The transactions are recorded in the block and then verified by different users once the block is verified then it is blocked and encrypted if there is any other transaction made that will be stored in the other block and that block will have all the information about the previous block. This is because blocks are chained together which helps the users to track records till the very first block which is known as the “Genesis Block”.
Due to the use of blockchain technology users’ assets are 100% safe and there is no chance of altering any transaction records.
Even The chairman and CEO of JPMorgan Chase Jamie Dimon said this while praising DeFi.
"Decentralized finance and blockchain are real, new technologies that can be deployed in both public and private fashion, permission or not,"
How is it changing lives?
According to the World Bank, there are approximately 1.4 Billion people that are unbanked means these people do not have access to formal and regulated financial services.
Let’s see how DeFi will be beneficial for these people.
Financial Empowerment:
One of the main objectives of DeFi is to make people empower. The unbanked population would be able to take control of their finances without the need for any intermediaries. Additionally, people can also earn some passive income through staking and liquidity provisions.
Financial Inclusion:
DeFi can be a relief and savior for those who have been excluded from our traditional system. Any person with an internet connection can use the financial services offered by DeFi. This means people in remote areas where there are no banks or any other financial institutes can also access the DeFi services.
Lower Costs:
Traditional financial institutes charge high fees for their services like remittances and loans but with the help of DeFi technology, all these costs of financial transactions and services will be reduced significantly. This is directly going to help the people living in poverty.
Access To The Global Market:
The unbanked population would have access to the global markets and will be able to trade and invest in cryptocurrencies and other digital assets. This will help them to participate in the global economy and potentially earn higher returns on their investments.
Security And Transparency:
In the traditional banking system, individuals are required to disclose their personal information including their name and address, etc which can be a risk to their privacy and security but as DeFi operates on blockchain technology all the transactions are conducted anonymously which provides a better security option for users.
Transactions made on DeFi networks are also immutable means they can not be altered or deleted.
Additionally, DeFi applications are open source which means anyone can ensure that are verified and secured.
DeFi has the potential to revolutionize our traditional financial system because of that it has been a threat to our banks. Not only that but DeFi can also positively impact the lives of many unbanked people and the overall population as well.
To make the most out of this amazing technology we need to educate and aware people so that they can benefit from it at every step and become self-sufficient as well.