Decentralized finance, more commonly known as DeFi, is rapidly gaining ground within blockchain technology use cases. The objective of this system, which aims to differentiate itself from the traditional one, is based on the extra degree of transparency and decentralization of all the parts involved in the process.
The DeFi is created with the purpose of converting conventional centralized structures into decentralized systems, where the intermediation of trusted third parties is eliminated. The execution is carried out through the well-known smart contracts, within a blockchain network. Here, an unalterable record of each action is reflected. The most widely used blockchain is Ethereum. This is where the vast majority of DeFi applications are based and where millions of transactions occur on a daily basis. They are the so-called decentralized applications (dApps).
What benefits does a decentralized system offer?
Decentralization solves infrastructure problems by eliminating the point of failure and ensuring that records can be safely shared between different nodes on the network.
For users, the most immediate benefits are instant or extremely fast transfers, that drastically reduce fees and charges. In addition, DeFi offers the opportunity to create equitable access to financial services, offering a solution for those who do not have access to financial services due to isolation, lack of funds, political oppression, etc.
Another benefit of DeFi is the extremely high yield known as «yield cultivation», which allows investors to request and lend their cryptocurrencies at rates much higher than traditional banking and investments.
Common DeFi Applications
A practical example of the use of a DeFi would be when requesting a loan. Instead of accessing a bank, submitting dozens of documents and waiting days for a response, you could apply for the loan through a DeFi platform. Through a smart contract, the conditions of said contract would be established, in a transparent and clear way and self-executable. Likewise, the action would be visible and recorded on the platform in an immutable way on the blockchain.
DeFi’s most significant footprint is in the remittance market. The context surrounds the existing problems faced by many workers to send money to their families that are in foreign countries. Above all, because of the high cost it entails. With DeFi Decentralized Finance, it will be possible to reduce the fees associated with sending money by up to 50% or more. In addition, the transactions would take place immediately.
The future of DeFi
The future of decentralized finance appears to be consolidating. As the world moves towards a digital and decentralized future, we are already seeing tokenized assets including digital gold, non-fungible tokens (NFTs), while many governments around the world seek to establish central bank digital currencies (CBDC) .
The use cases for smart contracts are exponential, ranging from DeFi to gaming, tokenized real-world assets, conditional payments, gambling and betting applications…
As decentralized technology continues to revolutionize the way people and organizations interact, exchange information, and access financial services, smart contracts and DeFi will continue to create transparency and financial freedom.
Without a doubt, DeFi is a vehicle that opens the doors to international investments without so much bureaucracy, costs and time and with higher levels of trust and transparency. A vehicle so that unbanked people can access services without the intermediation of banks, having the same conditions to evolve personally in their development.