The traditional financial system is built on top of banking, which in itself is a highly centralized, malleable and dependent system prone to manipulation and external factors. As such, banks are not only limited in their reach to those most in need, but are also restricted in the amount, quality, scope and quality of services they render.
There are millions of unbanked people around the world who cannot receive financial services from banks for a variety of reasons – lack of personal IDs, insufficient funds, inaccessibility of branches, political situations, literacy rates and so on. This creates numerous problems on the individual and macroeconomic levels, restricting the development of human and national potentials through the limitation of loans and other financial services.
The advent of the decentralized infrastructure built on top of blockchain networks has given the global population the chance to take advantage of an alternative financial system built on a principle that does away with centralization, entry thresholds, regulatory restrictions and other factors. The result was the development of Decentralized Finance, or DeFi for short.
DeFi In The Flesh
At its core, DeFi is a combination of various decentralized financial applications, or dApps, operating within a single ecosystem built on the basis of a combination of blockchains and their networks. The goal of DeFi as a market, sector and movement is the creation of a decentralized, permissionless and free financial system without any centralized governance that would be available to anyone around the world and would offer a variety of financial instruments on a peer-to-peer basis via a set of dApps.
Such a system would essentially create an alternative global financial framework that would be accessible by anyone with a smartphone and an internet connection, granting the benefits of financial services and instruments to those isolated from the traditional financial system. The use of blockchain would ensure full transparency of all operations and guarantee the fairness and trustless nature of the interactions of the participants.
Main Benefits of DeFi
One of the main benefits that DeFi offers, apart from universal accessibility, is its decentralized framework, which excludes the need for any intermediaries. The lack of the latter leads to the reduction of costs of services for end users. Since DeFi operates as a set of interoperable dApps, the lack of any physical bank branches and intermediary services automatically reduces the expenses associated with the operation of the system as a whole. In addition, blockchain networks offer considerably faster transaction processing, which trumps any gateway providers on the traditional financial market.
Another major advantage of DeFi is the broad range of instruments on offer that can be used not only as alternatives for traditional financial services, but as profit-generating sources. Among the services that DeFi offers are traditional borrowing and lending on a peer-to-peer basis with instant settlement of related transactions and digital asset collateralization at interest rates lower than in banks. The provision of stablecoins as alternative means of payment is another service of the DeFi sector, providing users stabilization of their digital assets from price volatility or as means of value storage.
DeFi platforms also offer a variety of marketplaces and add-on instruments, such as staking pools that allow users to generate passive income by providing their liquidity to exchanges and receiving rewards at interest rates in the double digits. Decentralized exchanges on the basis of DeFi platforms are emerging as the leading providers of liquidity and investment instruments like structured deposits, derivatives and others.
Though the DeFi sector is new and is evolving, marred by cluttered interfaces and oftentimes confusing schemes of operation, the potential it bears in becoming a full-fledged parallel financial system is high. The high yields of returns on deposits in the sector, low costs of entry, the convenience of accessibility and the broad variety of instruments and services on offer in DeFi are its main advantages over traditional banks.
We at Midas.Investments rely on Defi as an offramp for our BTC and ETH exchange rates.
Anyone willing can become part of DeFi through Midas.Investments and the broad range of instruments it offers for market entry and portfolio deployment.