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OPINION: Experts’ guide to understanding the role of DeFi in digital finance

Business Insider India logo Business Insider India 1/26/2022 Neeraj Khandelwal
OPINION: Experts’ guide to understanding the role of DeFi in digital finance © Canva OPINION: Experts’ guide to understanding the role of DeFi in digital finance

Decentralised finance (DeFi) is an emerging technology that has gained a lot of traction in the global financial industry. It is based on secure distributed ledgers similar to those used by crypto and run entirely on blockchain networks rather than through intermediaries . DeFi was first introduced in 2015 through the launch of Ethereum - an open-source blockchain technology that enables digital transactions across the globe. Since then, it has evolved to become the most popular open global financial system. Through DeFi, any user with an internet connection can access financial services, especially transactions in crypto, from anywhere in the world.

Decentralised finance allows members to securely verify, execute, and record their own transactions. This has enabled many developers to use Ethereum's DeFi apps to create and launch decentralised applications that run on a distributed computing system and build their own currency with it. As a result, the industry has witnessed a rise in the number of users opting for Ether.

Growth and the role of DeFi

DeFi has the potential to financially empower billions of people throughout the world, completely removing third parties from such financial transactions. DeFi systems continue to expand the financial services available to network participants. Traditional banking and financial services aren't the only services offered by DeFi platforms. DeFi system is self-regulatory thus allows you to keep track and control your own finances. This eliminates the need for third parties, providing consumers ultimate control over their transactions through the use of open-sourced blockchain smart contracts. Due to its 24X7 accessibility, transactions and trading can be done from anywhere at any time.

DeFi blurs the line between average customers and affluent individuals or institutions, who have access to a wider range of financial products. A DeFi lending pool is open to anyone who wants to either lend or borrow money to maximise the efficiency of their capital. It is a concerted, “crowdsourced” attempt to put digital currency to work, providing users with financial incentives to keep crypto rather than speculate on price swings.

Benefits of DeFi

A decentralised finance system offers various benefits in addition to online payments. Money transfer is just one facet of the current centralised financial system; nevertheless, decentralised finance intends to offer aspects of the traditional financial system, — exchanges, loans, insurance, and savings accounts — to all, regardless of socio-economic background.

Future of DeFi

DeFi is still at the very elementary stage of its evolution, mostly because it is unregulated. Yet, but with its rapid adoption in global financial systems, it will soon become a significant participant in our financial landscape. For the past couple of years, DeFi’s vast network has enabled users to swap, trade, deposit, borrow and lend crypto to maintain and grow their financial portfolios. DeFi’s true potential can be further harnessed when it eventually moves beyond Bitcoin and Ethereum towards adoption by lower-liquidity crypto assets.

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