Defi is also is known as decentralized finance which leverages existing blockchain technology into a decentralized micropayment platform without any intermediaries. Defi is one of the technological concepts which got huge requirements from the banking sector as well as from those who deal with a large number of the financial transaction. Cryptocurrency transaction is accepted in most of the countries around the world as it facilitates with an easy and fast transfer of money within seconds with an assurance of no middlemen. The DeFi is also known as open finance which is powered by blockchain.
The main problem with the current banking transactions is, it takes time to send money globally and also it charges with a customer service fee for every single transaction, which isn’t acceptable for all customers. Though the transaction fee for a big amount is acceptable, it isn’t that feasible for those who transfer small amounts. The current banking system also puts a bar on the minimum amount a customer can transfer which makes the current banking system all more narrowed.
The most promising feature provided by blockchain for DeFi is a smart contract system. The system acts as a virtual medium between the two customers directly. One can send any large or small amount to another customer by calling a transfer function of this smart contract feature. This enables the user to send the money globally within seconds and no third person is watching that move, instead of that a bunch of pseudo-codes is executing that transfer for every customer.
The best example where DeFi is trustworthy and more efficient is the whale transaction in bitcoin that occurred in 2019, where someone transferred bitcoin of worth 1 billion in seconds.
From the above images, we can see that about 94505.13 bitcoin of worth 1 billion has been transferred and nobody know who did it and, the anonymous person didn’t have to pay a single penny from his pocket as transaction fee. The above transaction is known as whale transaction in a blockchain platform.
The decentralized finance system will power up the existing finance system which is owned by a central authority, also make it automated assuring zero error and no unwanted service fees. The defi has been hot favourite adoption for banking industry where bankers need not to worry about the transaction entry on their private ledger. Moreover, defi is amplified by the smart contract facility which enables each bank to make their own cryptocurrency and track each and every transaction done by their customers.
ADVANTAGES OF DEFI
Traditional financial institutions like bank act as an intermediator between the two end customers by charging a fee from both sides in every single transaction. The DeFi doesn’t need any middlemen at all as it controls the entire dispute that occurred in the application through a smart contract. As the deployment of DeFi is on the top of the blockchain, there is no chance that a single point of failure occurs. Moreover, the data is recorded without any error.
Open leading protocols are one of the most favorite use cases of DeFi. Over the traditional lending and borrowing method, it can settle down instant transactions, digital asset collateralization, elimination of credit checks.
With the help of DeFi, monetary banking can be regulated in more efficient manners like issuance of stable-coins, mortgages, and insurance
Through the issue of the stable coin, the bank can peg that stable coin value with real-world asset and make transactions faster and convenient way
Ex: issuance of stablecoins, mortgages, and insurance
Some of the most demanding application of Defi is decentralized exchanges, which customers can sell and buy cryptocurrency with any interference of intermediaries. Since it requires less wok force the fee is comparatively very less than centralized exchanges.
CHALLENGES OF DEFI
The performance limitations, the major factor which is slowing down Defi, compared to the traditional payment system, DeFi requires some time to complete its action. Moreover, the challenges are not only constrained with performance issues, but the crypto regulations adopted by various governments are also putting this promising technology into a sleep mode. Therefore, the main problem arises while adopting this technology as a universal solution.