An Explanation Of Decentralized Finance (DeFi) In Terms Anyone Can Understand
Deregulation is the talk of the finance industry as cryptocurrencies continue to attract that many more investing dollars. Though most people understand what decentralization means, many are uncertain as to why the term is so important in the context of finance.
A large part of the push toward decentralized finance is fuelled by the growing distrust of the Federal Reserve. Decentralized finance, also referred to as DeFi for short, has the potential to revolutionize the financial landscape.
Defining Decentralized Finance
DeFi is an overarching term that refers to the elimination of central control, rules and guidelines governing the exchange of stores of value. This term is applicable to cryptocurrencies including Bitcoin, Ethereum and others that rely on the blockchain for secure transactions. The term of “open finance” was used to refer to decentralized finance prior to the creation of cryptocurrency.
Those in favor of DeFi hope that this somewhat anarchical approach to decentralization disrupts the mainstream of the financial industry, shifting power away from the Fed and toward retail investors.
DeFi’s roots are in the blockchain. The blockchain underpins Bitcoin and other cryptocurrencies, ensuring a ledge of transactions are recorded pertaining to the purchase and sale of crypto value stores. In other words, DeFi removes centralized control from a single source such as the Fed, opening the door for fast and secure crypto transactions without meddling oversight and interference.
DeFi’s Appeal is Growing
Aside from decentralizing control over value stores, DeFi is also inherently appealing as it eliminates middlemen parties from financial transactions. Investors who choose to buy and sell cryptocurrencies such as Bitcoin and additional digital-native value stores don’t have to rely on traditional legacy digital processing methods such as those provided by PayPal. This decentralized approach reduces the control and fees of the middlemen parties.
It is now possible to use Bitcoin to purchase products and services in select cities, meaning there is no need to involve a middle man financial institution that would otherwise receive money in the form of a fee when a credit card is used for purchases. The use of Bitcoin also prevents a middle man financial institution from pausing or stopping the payment, ultimately ensuring the transaction is complete without even the slightest bit of interference or unnecessary expense.
DeFi Will Continue to Expand
It appears as though federal and state governments in the United States will not step in to interfere with the progression of DeFi. If DeFi remains unimpeded by governmental regulations, it will prove applicable to economic transactions beyond the realm of crypto. DeFi paves a path toward the secure purchase and sale of insurance, loans, derivatives, crowdfunding and even sports gambling with crypto as opposed to credit cards and traditional currency.
DeFi applications center on decentralized exchanges on the web. These exchanges allow for the exchange of currencies, typically in the form of the United States dollar or another traditional currency for a cryptocurrency such as Ethereum, Bitcoin or DAI.
DEX exchanges bridge the gap between parties, empowering them to trade crypto with each other without the need to entrust a middle man financial institution to transfer funds on their behalf. As time progresses, lending platforms, predictions markets and other DeFi platforms will inevitably take shape, potentially allowing for a society-wide transition away from the conventional dollar toward the use of Bitcoin or another cryptocurrency without interference from an obtrusive governing body.