What is Decentralized Finance (DeFi)?
Whenever you are a crypto pro or a beginner, you have probably come across the peculiar term DeFi, the short form of Decentralized Finance. What does it mean?
The Decentralized Finance refers to the financial ecosystem comprising tools, resources and platforms that automate traditional operations without any third party interference. Services include: decentralized exchanges, lending, borrowing and prediction markets, assets, derivatives, payment networks, and insurance.
Most of the DeFi dApps are built on Ethereum, known for its flexibility with Ether (ETH) as its native cryptocurrency. In a word, DeFi is a blockchain-built lego-like financial open source software.
DeFi vs FinTech
You might have heard that DeFi is regarded as the complete opposite of FinTech, traditional financial technology services, notorious for the high level of bureaucracy. The truth is that DeFi keeps on being an open source while FinTech is about proprietary software.
Advantages
DeFi is supposed to be revolutionary, and it has some obvious benefits to pay attention to. Firstly, DeFi is an open system, so anyone can set up an app and use it with no bureaucracy to fit in. Secondly, it is flexible. Anyone can use DeFi and adopt it to their personal needs. Smart contracts are at your disposal.
Financial inclusion is among DeFi’s major benefits. Being unbanked means that you have no checking or savings account, and receive no financial products or services, or in a way underserved. Nowadays there are nearly 2 billion unbanked people: 225M in China, 190M in India, 100M in Pakistan, and 95M in Indonesia. Almost 9M of the unbanked in the USA. Looks creepy? But DeFi banks the unbanked, working for financial inclusion and letting everyone from all over the world to use the same financial opportunities. The Internet connection is the only circumstance that counts.
Last but not least, DeFi is a cure for the volatile currency that enables users from such volatile countries as Egypt, Thailand and Turkey to benefit from financial operations.
Problems
The advantages represent the DeFi dream without a hitch, but the reality strikes making it non-revolutionary, as one may think. Problems are marked by the two major aspects: security and dependency.
The first thing is that the openness of DeFi makes it a trust-minimized software with vulnerable protocols. The notorious DAO hack happened in June 2016, but this was not the only incident. For example, the Ethereum-based bZx protocol, the seventh hugest DeFi project, has been recently attacked with $350k lost in a click. The introduced solution was a decidedly non-decentralized master key. Litecoin founder Charlie Lee called the system a «theatre», that can be easily damaged by a centralized entity.
Moreover, DeFi’s dependence on ETH results into no backing or stability to be proud of. Ethereum keeps on dominating the DeFi lending marketplace, and due to its abrupt downturn even MakerDAO’s protocol has prepared for a shutdown recently. ETH, being the most of the DeFi money, experiences the highest drop, shaking the full system of lending and borrowing. Today 82% of its owners sustain losses, and the relative strength index shows more waste to come.
Speaking about the problems caused by the users themselves, some people are not ready for being their personal banks. However, if you have the total control of your finances, it is you who bears the blame for forgotten passwords and lost private keys. The research shows that nearly 20% of all BTC has been lost just due to users’ poor memory. Meanwhile, the chances to get the money back are pretty fat for the unlucky owners: it takes months and great sums, and a low percentage of decryption operations can be called successful.
Solutions
As you see, DeFi has its imperfections, but what to do if you are already in the game? Well, NOWPayments has prepared a few tricks for you.
As a lender, you can use DeFi as the source of your passive income. If you are a borrower, you can buy an asset and sell it straight away, and exchange it for any other crypto coin. Besides, you are free to get governance right by borrowing a token temporarily.
Stay tuned with the course of the financial market reading daily predictions. And you can also just relax and follow our Twitter with the latest news.
With NOWpayments you can make all types of transactions in a wide variety of cryptocurrencies. Now there are over 150 coins to make the most of, and we are always eager to expand the list in accordance with your needs.
Start now to benefit from DeFi and make crypto your lifestyle!