Since its launch, decentralised finance (DeFi) has continued to grow in popularity, attracting millions of investors worldwide. According to an article, the number of active DeFi wallets had grown to over 4.3 million by January 2022.
This growth shows that people believe in the future of a decentralised financial system. DeFi is built on the blockchain, and it conforms to the values that Web3 stands for, which are inclusion, openness, permissionless 24/7 access, and transparency.
The main idea behind DeFi is to decentralise all financial activities and give individuals control over their financial assets. While it goes against the already established centralised nature of modern banking, in the few years it has been active, DeFi has been reshaping the digital finance space.
What is DeFi?
Decentralised finance (DeFi) is a new financial system within the cryptocurrency sector focused on providing decentralised financial transactions. With DeFi, your digital money is stored in a DeFi wallet and can be sent or lent whenever you want without third-party interference.
DeFi is built on two primary principles; decentralisation and peer-to-peer transactions. Decentralisation ensures no single person or group can be in charge of the Blockchain network DeFi operates on.
Bitcoin is an excellent example of a DeFi project. Regarding peer-to-peer transactions, bitcoin introduced the possibility of direct digital payments between two parties.
This direct transaction is impossible in the centralised banking world or even with an online service like PayPal. Users must pass through the bank, which acts as a third party, to complete their request, and send money to the other person. The issue with third-party involvement is that they take a share out of each transaction, and because they operate under a centralised governing body, they could be censored or hacked.
DeFi eliminates the need for third parties and allows for direct transactions from one DeFi wallet to another. Traditional finance intuitions, like banks, have service fees whenever you use their offers. DeFi eliminates these fees from its transactions. Your money is stored in a secure DeFi wallet, and you can transfer funds whenever you want.
DeFi continues to evolve every day, and the surrounding regulations are also changing.
The Future of Decentralised Finance
DeFi faces many challenges as a new financial intuition because it goes against the long-established, popular centralised financial ideals. This includes online and physical banks, as well as crypto exchange platforms.
Here are some essential aspects that set DeFi apart from regular, centralised financial institutions and transactions:
1. Easier Borrowing and Lending
Decentralised finance has simplified the process of lending and collecting loans. With traditional banks, taking loans is a very long and stressful process and requires multiple background checks and interviews with the bank.
DeFi rids you of all this third-party involvement. You can easily collect loans; all you need is collateral. This is what will stand in place of that loan as confirmation that you will pay it back.
The collateral involved will also be valued higher than the amount you're borrowing, so the lender is sure they will be paid back.
Most times, the collateral could be a Non-Fungible Token (NFT) or another digital asset. You can transfer and collect loans from other users using your DeFi wallet.
2. Passive Income
Blockchain models like bitcoin, NFTs, and DeFi are fast-growing ways of earning passive income. It opens up lots of options for big and small investors. Some common passive income options when using DeFi include yield farming, DeFi lending, becoming a liquidity provider, etc. You could also deposit your DeFi in a DeFi wallet that will pay you an APY (annual percentage yield) and get paid yearly.
3. Transactions Built On Honesty
The honesty and trust in decentralised finance transactions are what separate it from traditional finance transactions.
DeFi is built on a Blockchain network, and thus, it operates with complete transparency and accountability. Every transition ever made is open for viewing by the public. You can review past transactions at any time, and each person is held accountable for their actions.
This builds a model of trust not found in centralised financial institutions.
4. The Rise of Instant Transactions
Decentralised finance offers the possibility of instant transactions that are completely safe. Digital assets sent between two DeFi users will arrive in your DeFi wallet within seconds of sending it.
Centralised finance transactions are known for being slow and sometimes inconvenient. Big transactions often require people to visit the bank multiple times and fill out countless forms. Because of the centralised nature of banking, hacking into them could lead to a loss of money for everyone with funds there.
DeFi transactions don't need any paperwork, no matter how large the transaction is. Its decentralised nature also prevents it from being hacked.