We rarely write on the subject of international finance or banking regulations because the subject is not very glamorous. However, for some time, a new phenomenon has been reshuffling the cards of classic finance, and we are witnessing the live effects.
We are talking about the Decentralized Finance DeFi. Introduced by blockchain, cryptocurrencies, and smart contracts, the DeFi is changing the finance market – especially the crypto world. One can observe critical alterations in types of investments, rates of return, and the individual management of taxes – on a large scale.
This phenomenon of DeFi fascinates but also questions the legitimacy of current financial systems spread around the world. Let’s see how this new change is becoming a trend in the finance sector:
First Understand What Actually DeFi is?
It all lies in the name. The DeFi is the acronym for Finance + Decentralized. The word finance refers to traditional and classic financial tools that have existed since the dawn of time, such as buying, selling currencies, transferring money, loans, credits, trading, betting, insurance. Till this point, nothing new under the sun.
The word “Decentralized” refers to the basic operating mode of blockchains. Each protocol is carried by a multitude of servers to perform instantaneous transactions. Transactions that are transparent and auditable. A multitude of servers carries each protocol by everyone on the network. In short, DeFi brings immediacy, transparency, and availability to anyone – on the table.
The objective is to create financial transactions, accessible to all, in a decentralized way without an intermediary and not regulated by usual central bodies.
But What Is The Revolution That Defi Is Promoting?
The base model of DeFi is not new. It consists of tools that have been known since the dawn of time for:
- Make transactions, either buying or selling all types of items with all types of currencies.
- Save and manage your savings with interest rates (borrow and staking)
- Ask for a loan with interest rates, mortgages, or pledges (loan and lending)
- Trading in stocks, derivatives, currencies, forex.
So nothing really new. But since the banking and financial industry has not been questioned for decades, the arrival of DeFi challenges the traditionally accepted agreements. The same goes for government financial institutions.
Nothing Very New Then Why DeFi?
Decentralized finance companies are in demand because of the following reasons:
- No Intervention
In the DeFi cryptosystem, an individual lends money in the form of cryptocurrency directly to another individual. The intervention of a bank, a lawyer, or another intermediary then becomes unnecessary. The system works with the blockchain and the creation of smart contracts.
- You Just Need The Collateral
The DeFi system is decentralized and uses smart contracts. So each loan requested is necessarily accompanied by collateral. The collateral eliminates all the usual administrative hassles: no need to show the last three tax records, etc.
- Secure Transactions
The use of the blockchain guarantees the security and authenticity of transactions. The blockchain is a distributed network. This means that all users have some sort of copy of the history and transactions of the blockchain. It is, therefore, impossible to modify it without the other members of the network noticing it.
Which Crypto To Use?
There are a multitude of different blockchains available in the market. Decentralized finance is growing in many of them, but Ethereum is undoubtedly the pioneer. On the Ethereum blockchain, you can have money lending services, decentralized trading platforms, or savings systems that are similar to a classic passbook. However, it is upto you to choose the one that serves you as the best DeFi crypto.
Before our eyes, a whole new alternative finance ecosystem is being created, with new types of investments, gains, and losses. And this is just the beginning!