Decentralised finance, or DeFi for short, is a new type of financial system that has been gaining traction in recent years. It is a system that uses blockchain technology to create a peer-to-peer network that allows for the transfer of assets and the execution of financial contracts without the need for traditional intermediaries such as banks or brokers. In this article, we will explore the benefits of DeFi and how it works.
The Benefits of DeFi One of the primary benefits of DeFi is that it allows for more financial inclusion. Traditional financial systems often exclude individuals and businesses from accessing financial services due to their location, income level, or credit score. DeFi, on the other hand, allows anyone with an internet connection to access financial services such as loans, savings accounts, and investment opportunities. This means that people who were previously excluded from the traditional financial system now have the ability to participate in the global economy.
Another benefit of DeFi is that it is more transparent than traditional financial systems. Transactions on the blockchain are publicly visible, which means that there is a level of transparency that is not possible with traditional financial systems. This transparency can help to reduce fraud and corruption, as well as increase trust in the financial system.
DeFi is also more efficient than traditional financial systems. Transactions can be executed instantly, without the need for intermediaries such as banks or brokers. This means that transactions are faster and cheaper than they would be with traditional financial systems.
Finally, DeFi is more secure than traditional financial systems. Transactions on the blockchain are secured by cryptography, which makes them virtually impossible to hack or manipulate. This means that assets held in DeFi protocols are much less susceptible to theft or fraud.
How DeFi Works DeFi works by using blockchain technology to create a network of computers that maintain a shared ledger of transactions. This ledger is called a blockchain and is maintained by a decentralised network of computers, rather than a central authority. This means that there is no single point of failure, and the system is more resilient to attacks.
DeFi protocols are typically built on top of existing blockchains, such as Ethereum. These protocols are open-source, meaning that anyone can access the code and participate in the network. Users interact with DeFi protocols through a decentralised application (dApp), which is a user interface that allows them to interact with the blockchain without needing to understand the underlying technology.
One of the most popular types of DeFi protocol is a decentralised exchange (DEX). A DEX is a platform that allows users to trade cryptocurrencies without the need for a central authority. Users can swap one cryptocurrency for another in a peer-to-peer manner, without needing to trust a centralised exchange to hold their assets.
Another popular type of DeFi protocol is a lending protocol. These protocols allow users to lend and borrow cryptocurrencies without the need for a bank or other financial institution. Users can earn interest on their crypto holdings by lending them out to other users, while borrowers can access capital without needing to go through a traditional bank.
Statistics on DeFi The growth of DeFi has been explosive in recent years. In January 2020, the total value locked (TVL) in DeFi protocols was just $670 million. By January 2022, the TVL had grown to over $200 billion, representing a 30,000% increase in just two years.
The growth of DeFi has been driven by a number of factors, including the rise of decentralised exchanges, the availability of decentralised lending protocols, and the increasing interest in cryptocurrency as an asset class. DeFi has also been fueled by the development of new use cases, such as non-fungible tokens (NFTs), which have opened up new possibilities for digital ownership and commerce.
Decentralised finance is a new type of financial system that has the potential to revolutionise the way we interact with money. It offers benefits such as financial inclusion, transparency, efficiency, and security, and has seen explosive growth in recent years. As DeFi continues to evolve and new use cases emerge, it will be interesting to see how it shapes the future of finance. Whether you are an individual or a business, DeFi offers exciting opportunities to participate in the global economy in a new and innovative way.