The rapid growth of digitalization has made changes for all the dimensions which involves for human life. Now a day’s people around the world are stepping towards to a digitalized financial era. Due to the fast growth of digitalization, the centralized finance which suffers from mismanagement, fraud and corruptions shows a bit obsoleted situation. Today the globe has started gathering around the form of decentralized finance.
Decentralized finance or DeFi is a digital platform of finance which does not depend under an intermediate and it does not govern by any central authority. Furthermore, DeFi holds a fully transparent financial service which is available to any user around the world and it can be simply operated without any central authority. Blockchain networks can be identified as the foundation of DeFi. More specifically, DeFi applications on public blockchains shows a new path for the entire digital finance market.
Potentials of DeFi
Cryptocurrency is a formal credit system which is handled by a decentralized network. In such a decentralized network, cryptocurrency is used instead of physical money which are used in a traditional credit system. Financial services we involve in our day to day affairs such as money transferring, saving, investing, borrowing and lending, can achieve many potentials in terms of DeFi. Using DeFi for lending and borrowing services may speed up the settlement processes and it improves the security of both peers who interacted within the service. Since the service is powered with cryptocurrency and blockchain structure, the verifications become faster and smarter while it maximizes the attending crowd around the service
In other hand, DeFi allows a decentralized market place as well. Most of the decentralized exchanges (DEXes) are comparably challenging services. DeFi allows the users to exchange the digital assets without an intermediate with the help of a smart contract. Smart contract is almost similar to the physical contracts which are used in traditional financial services, only the difference is smart contract is a digitalized computer code which is used to state the terms and specifications of the digital transaction. Since the entire network is virtually maintained, DEXes requires fewer exchanging fees for a wide range of transactions. The blockchains of DeFi, ensures to reduce the number of failures within the transaction because the system is free of conventional financial systems.
Considering the money and banking services of DeFi, a currency called stablecoins should be discussed. It is important to understand why it is difficult to use Bitcoins and Ether of Ethereum for this purpose. While Bitcoin is in the DeFi domain it is having a very basic programmable functionality. Considering bitcoin, ether is having better programmable functions, but still Ethereum is high volatile. In the discussion of more reliable financial services which are required by the world, expects a more stable currency. To full fill the need of a stable currency, stablecoins came to the fore. Stablecoins are a type of cryptocurrency which are pegged to major real-world currencies. Due to the rapid fluctuations of the real currency decentralized stablecoins can be used as day to day digital cash.
DeFi as an Alternative for Typical Banking
Conventional banking and finance services always depends under a middle man. It can be either a credit card company or a non-banking financial institute. These companies or institutes acts as an application programming interface (API) which establish and maintain the relationship between end users. DeFi motivates the users to save their cut offs by removing the above middle party from the financial service. Since no traditional, manual management is involved within the system and having a system which is fully virtually occupied, will allow the public to gain more benefits.
Lack of familiarization
Since DeFi is a developing and an experimental platform it holds some challenging facts as well. The main challenge is that, bad user experiences. In the present situation, Users who are using a centralized network should give an extra effort to use a DeFi system. DeFi itself should provide a better establishment for the normal community who is not familiar in DeFi.
High risk in users end
The user is fully responsible while using DeFi applications. Since no centralized authority is mediated, the risk should be bearded by the user. This can impact the user in a negative manner in terms of high risk.
The blockchain applications inherently shows a slower performance. That is why DeFi is more comfortable with Ethereum than Bitcoin. The programable capability of Ethereum provides an ability to get out of these limitations of DeFi.
Anyhow, moving for a decentralized financial system, would entirely change the next decades of finance. Managing and using a DeFi system wisely with a long-term vision would satisfy the whole digital financial trend.