The Rise of Decentralized Finance (DeFi): The Ultimate Solution to Banking Trust Issues
Decentralized Finance (DeFi) is a revolutionized financial system on the Ethereum platform that enables users to perform financial activities from anywhere with an internet connection. Through DeFi, you can perform most of the tasks that banks support, including lending, borrowing, trade derivatives, and earning interest, but with no paperwork or any third-party involvement.
With recent bank collapses like Silvergate and Silicon Valley Bank, the need for more robust regulations and new implementation of technologies are popping up. Financial experts are anticipating more banks are on the edge of the financial crisis and the governments should take appropriate actions to keep the banking industry on track to avoid any further damage.
All these happenings have created a buzz among the public on banking trust issues. Fear has been induced in the minds of the people and they are looking for an alternative to traditional finance to deposit their funds safely and withdraw when they need.
Decentralized Finance satisfies all the financial criteria like a conventional bank. DeFi has many features that banks don’t.
The drawbacks of Traditional finance are:
- The banking industry requires your personal details to open an account.
- Not all people can set up a bank account or have access to it.
- Governments and centralized institutions have all powers.
- Inflation affects banking rates.
- Financial markets have limited trading hours in different time zones.
- Sometimes, transactions take more time to get processed.
- Financial institutions often charge a fee for making a transaction.
- Banking institutions don’t function on holidays and weekly offs.
- Banks may stop working because of maintenance issues.
- You have only limited access to bank data and loan history.
- Banks require paperwork and meet their eligibility criteria to sanction you a loan and take a couple of days to release the funds while charging high-interest rates.
The Need for DeFi?
Decentralized Finance is a peer-to-peer open-source network for financial products and services. Defi provides full control of your funds where you can perform financial activities fastly without displaying your identity.
You can track your funds and trade anytime and from anywhere. DeFi is known for transparency, as anyone can view the product’s activities and check how the system works.
Most of the Dapp projects run on the Ethereum blockchain, others include Solana, Polkadot, Algorand, Cardano, etc.
The benefits of using DeFi:
- You can send money around the globe securely anytime.
- You can have access to stable currencies in Ethereum, as stablecoins are pegged to fiat currency on a 1:1 basis, thus eliminating the fear of crypto volatility.
- You can borrow funds with collateral and without any identification. Some lenders even accept NFTs.
- The decentralized ledger helps you to access loans from anywhere around the globe with flexible interest rates.
- You can do staking and yield farming using Dapps.
- You can lend your cryptocurrencies and earn profitable interest.
- You can save money using No-loss lotteries like PoolTogether and get a chance to win the draw and increase your amount. For that, you need Dai or USDC tokens.
- You can use Decentralized exchanges (DEXs) to trade different tokens 24/7, 365 days. Like, you can swap your ETH to Dai to participate in PoolTogether.
- You can perform trading with options like limit orders and margin trading at your convenience as the market never closes.
- You can create an automatic investment portfolio like DeFi Pulse Index Fund without depending on anyone or giving commission to any portfolio managers.
- You can look for crowdfunding ideas
- With Decentralized Insurance, you can take an insurance policy much faster and with affordable coverages at cheaper rates.
Some of the popular Dapps include:
- Uniswap V3
- Curve Finance
- Convex Finance
Every decentralized application has its pros and cons. Some dapps come with outstanding features for lenders and borrowers with stable interest rates. Users can avail flash loans/ no-collateral loans with fixed interest rates, and low transactional fees. Some dapps are prone to security threats. Do proper research while selecting any dapps. More dapps are under testing and the experimental stages of decentralized networks.
There are different Dapps for:
- Lending and Borrowing
- Token Swaps
- Trading and predictable Markets
How does DeFi function?
Decentralized Finance uses smart contracts and cryptocurrencies on the Ethereum blockchain to deliver financial services. A smart contract is like an agreement that starts when both parties accept it and it runs as programmed, and no one can alter the smart contract. Anyone can audit and inspect the contract, as it is not owned by a single entity.
Across the Decentralized ecosystem, many companies are investing in crypto industry as Decentralized Finance is becoming more popular in the crypto space. Artificial Intelligence and Machine learning have the potential to reform the DeFi protocols to enhance security & efficiency in the near future.
According to the coinmarketcap website, a popular platform for the cryptocurrency pricing market, the DeFi crypto market cap is $53.63B.
Top 10 DeFi tokens as per market capitalization:
- Avalanche (AVAX)
- Uniswap (UNI)
- Wrapped Bitcoin (WBTC)
- Chainlink (LINK)
- Lido DAO
- Stacks (STX)
- Internet computer (ICP)
- The Graph (GRT)
- Fantom (FTM)
DeFi is giving tough competition to the traditional banking industry. It is estimated that almost 5 million people use DeFi apps. Proper education is needed to make people aware of the open-source DeFi products and services, which motivates them to shift to the decentralized ecosystem.
Decentralized Finance helps users to do transactions using a mobile phone and internet connection, without the need for any intermediaries. However, you have to maintain your own records for tax purposes based on your region.