Decentralized Finance (DeFi) is an evolving finance platform that leverages the scope of the finance industry. Utilizing blockchain technology and smart contracts, the platform processes automated transactions without the need for an intermediary.
Due to the existing challenges faced by traditional finance platforms, many utilize the DeFi system as a viable alternative. What does the DeFi platform have in store for the future? Continue reading the article.
Table of Content
- What is Decentralized Finance (DeFi)?
- How Does a DeFi Platform Work?
- Why DeFi Platforms are Said the Future of the Finance System?
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is a platform that utilizes blockchain technology and smart contracts to enable peer-to-peer transactions. Unlike traditional finance which utilizes a central authority to control and monitor transactions, a decentralized finance system incorporates a decentralized approach, allowing all the participants of the system to engage in the decision-making process. The platform allows different services, including lending, borrowing, trading, and investments.
How Does a DeFi Platform Work?
DeFi Platforms operate on Decentralized Blockchains, in which data are stored in a block connected to each other. The platform allows Peer-to-Peer transactions allowing users to interact directly with each other. By eliminating the need for intermediaries the platform allows cost-effective transactions.
By utilizing smart contracts, a computer program that controls the activities of a blockchain using predetermined conditions. The smart contracts automate the transaction once the predetermined conditions are met. The smart contract eliminates the need for human intermediaries to validate the transactions, increasing the efficiency of transactions.
Once a transaction is verified and processed, it is added to the block, and the block is encrypted. Every such transaction is recorded in the block and each blocks are connected to the other, making it difficult to make changes to the transactions.
Why Decentralized Finance (DeFi) Platforms are Said the Future of the Finance System?
DeFi platforms work as a viable alternative to traditional finance platforms, offering a decentralized peer-to-peer transaction model. It mitigates the challenges faced by the traditional financial system by providing numerous advanced features, making it the future if the finance system.
1. Decentralization
DeFi platforms are operated on a blockchain, which is decentralized. Decentralization eliminates the need for intermediaries and carries out peer-to-peer exchanges. This eliminates the need for a central authority that controls and monitors the transactions as in traditional financial systems.
The blockchain distributes the power among all the members of the platform. The lack of a governing body gives the users complete control over their financial assets and also allows them in involving in the decision making process.
However, the platform is not fully decentralized, at some points, they require an intermediary for assistance. For example, a smart contract is decentralized, but to understand the conditions of the agreement the smart contract requires assistance from a lawyer.
2. Financial Inclusion
DeFi services can be accessed by everyone, irrespective of demographic location and history of credits. To access a defi space, a person only requires an internet connection and a compatible device. In traditional financial systems, the accessibility of services is limited by location, financial status, and other factors.
As the DeFi platform enters the mainstream market, marginalized and unbanked communities get access to the finance service.
3. Enhanced Transparency
Traditional financial systems are monitored and controlled by a central authority, making the decision-making rights engulfed within a small group. This prevents the participants of the network from understanding the happenings of the system. A DeFi system overcomes the situation.
Utilizing blockchain technology and its decentralized nature, DeFi allows all the users of the network to take part in the decision-making process and monitor the transactions. This transparency creates a trustless environment, meaning no one needs to rely on other members of the network.
4. Enhanced Security
The blockchain in which the DeFi system operates stores the data in blocks. Each blocks are connected to each other. Once the data gets stored in the block, it can’t be changed or removed. Since the blocks are interconnected, changing the data requires modifying the entire blocks linked, which is a cumbersome process.
In addition, all the transactions of the platform are publicly visible. If any changes are made to the block all the members can identify them, and take action against such activities, preventing the risks of scams and hacks.
5. Automated Transactions
DeFi platforms can carry out different operations automatically that are done with human support in traditional finance systems. The smart contract helps the platform automate the transactions on predetermined conditions.
Once the conditions are matched, the transactions get automatically approved, The automatic transaction eliminates the need for humans to monitor and verify the transactions, thus reducing the transaction cost.
An automated transaction is fast compared to human-controlled transactions, thus the number of transactions is high, increasing the efficiency of the platform.
Final Thoughts
DeFi platforms overcome the challenges of traditional financial systems, by offering a decentralized, secure, transparent, low cost, efficient and automated transactions. The advanced features of defi ecosystem makes the platform capable to serve more utility in the future. In the coming years, many more industries incorporates defi system to their platforms increasing the adaption of secure and transparent financial systems.