Defi is an acronym for decentralized finance. Defi is undoubtedly a fast-growing aspect of the cryptocurrency market and is worth almost (50 billion USD). It is generally referred to as financial applications built on blockchain technology. It aims to recreate the traditional finance systems such as the local banking system. It almost has the same principle as the local banking system in borrowing and lending money; the only difference is that Defi is without central control.
Let’s get a better grasp of this concept. Decentralization is a system without central control, while finance manages a large amount of money, especially the government or large companies. The difference is that some top men or the government do not control Defi. Like the traditional banking system, Defi also has the borrowing and lending feature. It is among the everyday use cases of Defi, among other complex traits. Defi promises a higher and more attractive interest rate than the traditional banking system. The only thing you will need to be qualified to borrow cryptocurrency is your ability to provide collateral with other crypto-assets and other crypto-related evidence. Although, the issuance of loans depends on the protocol of the particular Defi you are transacting with. Different Defi applications have their set policies; you have to research the application’s policies you want to transact with.
Use cases of Defi
- Borrowing and Lending.
- Financial banking services.
- Decentralized Trading places.
These are just a few use cases, among others.
To maximize profit, people leverage the borrowing and lending feature of Defi, as the interest rate is attractive and high. You could leverage on this, too. Defi enables you to lend someone your crypto and earn interest on the loan. You could trade your fortune from this using trading bots, as they are more risk-free and timely with trading. People use trading bots like bitql to automate trades.
Advantages of Defi
- Defi, unlike the traditional banking system, does not need intermediaries or arbitrators.
- Low-income users can benefit from these financial services since the traditional banking system uses intermediaries or arbitrators who are all out to make profits from the users. This service is almost available to everyone, as the cost is more reduced.
- It allows for a more frictionless financial system, unlike the traditional banking system.
- Defi is a more healthy finance system, as it doesn’t always require direct contact between individuals.
- It offers permissionless operations.
Disadvantages of Defi
- An excellent part of the traditional banking system is that it offers insurance to investors, but insurance cases in Defi are scarce.
- You will take responsibility for your mistakes. The Defi is built on the Blockchain, which means it is immutable. Any error from your side may not be reversed.
- It is a challenging task to find an application that is suitable for a specific use case.
- If peradventure the Blockchain the Defi is built on is uncertain or imperfect, the Defi inherits the same.
Defi is a blockchain form of finance with a lot of advantages over the traditional banking system. Although, it has its disadvantages. Let’s take insurance, for example; in case of loss or theft of assets, the local bank provides insurance to cushion the adverse effect losing valuables has on the user, Defi on the other hand, at the time of writing this article, has no such feature. Defi runs on the Blockchain, which means transactions with other parties are anonymous. It is a great innovation and, at the same time, a risky one. You are advised to stay away from any Defi application which you haven’t done proper and thorough research on.