Decentralized Finance (DeFi)The New Financial Revolution
Cryptocurrencies were the first application of blockchain technology. 2015 saw the advent of pre-conditioned transactions governed by smart contracts, a capability introduced by the blockchain network called Ethereum. Then came the wave of blockchain-based applications or dApps (decentralized applications) and interoperability between the various blockchain networks. Today, the technology is going through another evolution-spurt, effectively cementing the evolution of the Internet from being one of information to one of value: DeFi or Decentralized Finance
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is the new financial system that allows financial transactions such as transferring money, getting a mortgage, loaning, or earning interest to be done without any intermediaries like banks.
Financial transactions usually rely on trust. If you want to lend money to someone, you need to trust that you would get the money back; this is where the bank comes in. Banks, or any intermediaries, came in to be the trusted party. You deposit money in your account and earn interest, while banks loan your money to earn interest. Although it’s similar to you lending money to someone directly, banks have processing costs and risk not getting paid back, so they take some of the profits that you could have earned without an intermediary.
Decentralized Finance (DeFi) uses digital technology such as Smart Contracts on Blockchain instead of banks as a trust factor in processing financial transactions. Blockchain-based technology like DeFi is transparent and checkable. Decentralized Finance (DeFi) also allows us to continue using the financial products without high fees and the slow processing time of the middle party.
What is Centralized Finance?
Centralized finance is the financial system that we are all familiar with. Almost every aspect of banking, lending and trading is managed by centralized systems. This centralized system offers a high level of trust since other people are subsidizing your risk. When things go wrong, it might take a shorter time to fix the problems since you know who’s in charge.
But centralized finance systems come with their challenges. In the event where the entity who is in charge has an issue and the whole system stops, you won’t be able to do anything. Just like when the bank application crashes or the system is hacked. Centralized finances often slow things down and cost much more than they should without offering any transparency to your money management. The central bank can ease or tighten the money supply as much as they want without us having any control, while a decentralized system provides more transparency and equality.
Benefits of DeFi
Decentralized Finance (DeFi) is unique and has the potential to disrupt the financial market. Let’s see how.
Cheaper and faster transactions
Most financial transactions require an intermediary. If you want to transfer money from the United States to your parents in Thailand , you need an intermediary like Westen Union or Wise to help process the transactions. You then need to pay for operational costs to them. On the other hand, If you transfer money through online transactions without any intermediaries, you can avoid the costs and frustrating processes altogether.
Open the world for non-banks
Some non-banked people cannot benefit from the financial products as we all do. For example, without a credit history, people cannot get a loan to expand their businesses. Some can’t even open a bank account to store their money there. DeFi allows anyone to access the service from every corner of the world by just having a cell phone and internet access.
Easier to start a business
Back in the day, you might need to wait for months to get a business loan. If you are an artist, you might need to wait for an exhibition to sell your paintings. With DeFi, anyone can tokenize any asset and sell them digitally. No more complicated and expensive payment gateways or processes. Fundraising, loans, and payments are also easy, there are fewer barriers to starting new businesses, especially international ones.
What can Decentralized Finance (DeFi) do?
DeFi for lending and borrowing
Today, we leave our money or assets with the banks. We earn little interest while banks use our money to make more money, such as giving loans to people and earning high interest. Instead of leaving your money with banks, you can lend your money directly with DeFi by using digital assets such as Bitcoin. This means you can receive the entire profit from interest without paying processing fees or risk fees to banks.
Reduce the fluctuation in cryptocurrency with Stablecoins
It’s common knowledge that digital currencies such as Bitcoin fluctuate, making it hard to use them in daily life, but stablecoin do not. A stablecoin is pegged to an underlying asset, such as gold or forex reserves which act as collateral. their valuations remain free from wild swings. One of the good examples of a Stablecoin is USDT, where every token is worth 1 USD. Besides less fluctuation, stablecoins allows users to create virtual assets on DeFi. You can use any token as collateral, which means you can digitally sell any real-life assets like dollars, golds, real estates, or stocks.
Raise find digitally with Security Token Framework
There are countless real world out there, so it’s almost impossible to have as many digital assets as there are physical ones. Due to that fact, people developed frameworks to tokenize financial assets like bonds or stock. Under authorized supervision, we can now digitally/virtually raise funds easier than before instead of going through time-consuming processes like IPOs. With the test of time, we might see that people would prefer the digital ways over the old ways.
DeFi and Smart Contract
A smart contract is a set of conditions that any developer can write to put in a digital contract. For example, you buy a fridge from John. In that case, your payment will then be completed as soon your fridge is shipped, and John will receive it automatically. You don’t need to worry about paying in advance and not receiving the refrigerator. John also has peace of mind since he knows he will get the payment. Everything on the contract is on the Blockchain, which can’t be changed.
A smart contract allows DeFi to process financial transactions such as deposits, withdrawals, and even allows contract parties to use collateral. Smart contracts bring more liquidity to certain markets as it allows users to buy and sell tokenized stocks or fractions of collateral, increasing the capital pool. Decentralized Exchanges usually use Smart Contracts, so they don’t need an intermediary. This is why you need to read the contract (both smart and not smart ones) before
Understand DeFi with a basket of Decentralized Finance
A basket of Decentralized Finance is putting all the tokens related to Decentralized Finance (DeFi) together and weighting them to create an Index: theDeFi Index Perpetual Futures. This basket of Decentralized Finance lets you keep a close eye on the DeFi market, including market trends and investment signs.
Summary of Decentralized Finance (DeFi)
Decentralized Finance (DeFi) used to be seen as something that could only work far into the future. However, we have seen more adoption and use cases in the real world, showing that problems are waiting to be solved by DeFi.
We are excited to see how DeFi can offer better financial products for everyone. The possibilities are limitless; from higher interest rates than your traditional saving accounts, to a simple way to raise funds for your business, and much more.
forbitswap is an open-source decentralized finance space protocol an advanced transaction builder made simple — a system where anyone can swap tokens, trading, contribute tokens to a pool and earn fees, or list a token on forbitswap. Also, readily manage a range of various activities, That’s at the core value of what makes forbitswap protocol a more robust and transparent financial infrastructure.