What is DeFi?
Decentralized Finance, sometimes known as “DeFi,” is a new financial system that functions independently of centralized financial intermediaries such as banks, credit unions, and insurance funds. Instead, users may utilize automated smart contracts to transfer, trade, invest, and transact with one another using cryptocurrencies and digital assets, removing the need for these sluggish and expensive intermediaries.
Everything you need to know about DeFi:
Quatro DeFi is based on sophisticated distributed ledger technology (DLT) – often known as a blockchain – which aspires to upend the current financial order by creating a more transparent and fair economic system. Some of DeFi’s characteristics are listed below.
1. Open Innovation verse Walled Gardens:
The success of DeFi networks is a foregone conclusion. Anyone, wherever in the world, may develop trust-free financial services using public blockchains like Ethereum. It’s an open innovation sector. Even if they fail, their failures stack up and pave the road for better solutions. It’s like the three-headed hydra of money, where if you clip off one head, two more grow in its place. It is naive to believe that the present financial system’s walled gardens will compete with the quick procedure. To compete with an army of financial innovators, banks will need to speed up their decision-making process to keep their privileged position as financial intermediaries.
2. A Financial System Native to the Internet:
The DeFi movement’s central thesis is that we can create a financial system entirely based on the internet. Thousands of computers all across the world manage and administer it. DeFi protocols differ from our traditional banking system in that they do not require authorization. Their stakeholders choose their future course, and because they are non-custodial, they do not ask you to leave with your money.
Our key financial primitives of loan, borrowing, exchange and derivatives markets will be replicated and upgraded by this new internet of value. DeFi will make fundamental financial services orders of magnitude more accessible and cheaper, much like the internet did for information.
3. Censorship Resistant:
DeFi protocols are also unaffected by censorship. This resilience to censorship is only conceivable because these protocols are decentralized and do not rely on a centralized body to function.
In the coming years, the issue of censorship resistance will become increasingly relevant. Some of the world’s major digital services are already engaging in authoritarian-style censorship. The road to censorship is treacherous, and centralized systems will find it difficult to maintain a truly free and open platform. It’s just a matter of time before this type of restriction shifts from information to financial restriction.
4. Ethereum Gas Fees Are a Problem:
While DeFi’s and the entrepreneurs’ ambition to make the space reality is admirable, there are still obstacles in the way of their final goal. On public blockchains like Ethereum, these trust-less peer-to-peer financial services operate.
Ethereum handles the processing, execution, and settlement of requests from various services built on top of its network. This is similar to how internet apps send and receive data via the internet’s protocols.
Due to the surge of activity caused by DeFi, the Ethereum network has become very congested. The cost of processing, executing, and settling multiple transactions is high due to the congestion. Ethereum has a scalability issue that, if not addressed, might result in negative network consequences. The Ethereum network and its development community are seeking to solve this problem in a variety of ways.