Getting into the Nitty-Gritty of Decentralized Finance System aka DEFI
As you may know, that segment in the financial industry has taken the world by storm. The hype is valid, and the reason is the system’s transparency with no “Central” authority involved.
Yes, no central authorities are involved, and you own the system with your peers. Thus, this peer-to-peer network came into existence because of the evolution of the web or internet. Web 3.0 is a reality today, and decentralized finance is a subset of that.
The only middleman in Defi is your blockchain network, which is just software and not an institution.
The volume and the number of trading tokens in smart contracts have been continually increasing, and the decentralized finance System is still in its raw stages and needs to ripen up. Due to its decentral nature, there’s no authority to oversee the rules and regulations.
What Is Decentralized Finance (Defi)?
This is an emerging financial technology that is based on the distributed ledger. This same technology is used for the programable cryptocurrency. This technology removes middlemen and central governance or control systems from the money, money systems, and many other financial services.
Here are some key attractions for decentralized finance (Defi)
- It eliminates any central authority from the financial system.
- You can be your bank.
- Anyone can use this system with intermate access without needing approval from anyone.
- You can send, transfer, and make any financial transaction within a blink of an eye.
What does a Decentralized finance (Defi) infrastructure need?
The components of this infrastructure are:
The central ledger
Banks or the centralized finance system use the core to protect their transactions and store them. Defi, on the other hand, uses blockchain technology as its primary ledger. There are no additional checks and balances required. All the transitions are carried out in one place at the same time.
Open source and transparency
The basis of Decentralized Finance is a source that is open to all. You can view the code, fork it (hard and soft forks), copy it, and improvise. You may think you can’t audit for it since it’s open source. But every cent is accounted for and audited instantaneously.
A continuation from the previous point is that creativity is always looming over the De-Fi industry, as there is always room for improvement and the current frameworks are highly customizable and buildable. The common blockchain network has made all the difference and has given a common launchpad for newer developments to propel.
Your income status is not an issue anymore. All you need is a wallet address to access Defi applications and do as you please. This forms the basis for a no-discrimination zone where you aren’t asked to prove your identity, and no one knows who you are. Your wallet address will do the trick for you. This infrastructure makes DeFi a more reasonable means to an end in the future
Arguments against Defi
However, we are still in the initial stages of developing the third generation of the web. While there have been several encounters that have halted a massive outbreak of decentralized finance, some of the arguments against Defi are:
Lack of knowledge
The accessibility is across the globe, but the grasping power is lacking. People still aren’t educated about the perks of decentralization, and a steep and bumpy learning curve is associated with it. This prevents people from taking advantage of it and attempting to transform traditional fiat currencies into cryptocurrencies.
The volatility of cryptocurrencies is what fears risk-averse individuals. This fear heightens even more when public figures try to manipulate prices by saying something in favor or against a coin. You already know that a prime example of this is Elon Musk.
Bugs and security breaches
As extensively discussed, Defi is still new, and certain loopholes are left out in the open source, which could lead to fraud. A prime example of a bug in smart chain exploitation was the recent Poly Network Scam. A bug in the chain was used as leverage to hack into the network and resulted in 600 million dollars being stolen by hackers. The money was returned eventually, but it remains a threat to the Decentralized finance world.
Not that banks are hackproof, but the trust with banking has been built over a while, and it will take some time for that kind of trust to make with Defi, as well.
Like everything in life, new systems take their own time to settle down. Education is important in this realm before we all make a 360-degree transformation into Defi and neglect the financial system we have used for decades.
Here are some words on the feature of the Defi:
Defi is in the very beginning stage of its great evaluation. We need time, awareness, and education to become more popular and widely accepted. From now, it is unregulated, and the ecosystem is not ready. And we need a long way to go or establishing this Defi. But we believe Defi will make this journey very short. Current laws does not support cross-border financial transactions. It has been regulated, and borderless transactions are not accepted yet.
Over the period, many questions will be answered, and this is an evaluation process. This system is also getting ready for feature use. Many questions and droughts must be answered and cleared before the Defi is set for safe use. Financial institutes also need to get reformed to accept Defi. We will see banks and other financial institutions get some way to cooperate and get into this Defi system. They will surely find some way how to make money from the system.