Decentralized Finance (DeFi) is the movement that leverages decentralized technologies to transform and enhance traditional banking services. DeFi has had quite a tortuous path ever since its inception, but today, the concept is finally gaining momentum. Over fourteen billion dollars is now locked in DeFi—a tenfold rise in just a few weeks. Why such a surge? What is DeFi exactly? And what are its main advantages? Let’s get right into it.
Decentralized finance is a rapidly growing sector of the crypto industry. While crypto coins stand as an alternative to the government-backed fiat currency, DeFi creates decentralized financial instruments that are separate from traditional centralized institutions.
The concept of DeFi is quite broad: a financial platform is considered DeFi if it has one or more decentralized functions. The main goal of the movement is to develop and operate financial Decentralized Applications (DApps) on top of a trustless and transparent framework (e.g. permissionless blockchains and other P2P protocols).
The list of DeFi services is long, but the most common use cases include borrowing and lending platforms, data analysis applications, index construction, funding protocols, identity management (e.g. KYC or AML), and advanced financial instruments such as tokenization platforms, prediction markets, and derivatives.
Today, the popularity of DeFi is growing exponentially, and the number of DeFi Dapps follows the same trend. These apps have already emerged in nearly every financial sector and keep enhancing the financial experience of both businesses and their customers. As the sector expands, it’s useful to understand the main advantages of DeFi Dapps and why they are so beneficial. Here is the list of Dapps’ main advantages.
1. Cost. For the traditional financial sector, banks and courts are indispensable components of the system—they act as intermediaries and arbitrators. DeFi applications, on the other hand, do not need any of those. Not only does the code always specify the resolution of every possible dispute, but the funds are constantly controlled by the users. Fewer parties involved means fewer costs, so DeFi is cheaper and more frictionless.
2. Open-source. The decentralized nature of the network allows for complete independence from any central authority, corporation, or agency that would monitor and approve the Daap’s operations. Instead, anyone can audit DeFi applications and validate their functionality, capability, and security. Moreover, users of the platform can be sure that no hidden coding is operating in the background.
3. Transparency and reliability. Another significant advantage of DeFi is that it is secure and transparent. Since most DeFi applications are built on public blockchains (mainly Ethereum), the data is completely public. It is distributed across thousands of nodes, and that leads to DeFi’s resistance to any kind of shutdowns or censorships.
4. Permissionless. Not only do DeFi Dapps have no central authority, but they also function without any gatekeepers. It means that anyone can participate—be it from the user or developer side. The approach is far cry from today’s traditional financial system that requires a potential user to undergo a myriad of regulatory verification processes before he can become a rightful participant in the global economy. On the developer’s side, creating a DeFi platform has never been easier—anyone can build a Dapp and offer it to the public.
5. Global audience. To participate in a DeFi platform, all one needs is a smartphone with an internet connection—and he can join the DeFi community in minutes. Such easy access allows for capturing literally global audience—even those who haven’t had any form of banking in the traditional financial system (and this is around 40% of the global population!).
The importance of DeFi cannot be underestimated, especially today, in times of global instability and unease. Many analysts see the sector as one of the most promising ones in the crypto space as it significantly expands the functionality and access to money in general. Not only is DeFi more accessible in terms of usage, but it also is much cheaper than traditional financial services (e.g. lower interest rates for loans and higher interest rates for deposits).
At Idealogic, we believe that although powerful, the traditional financial system has quite a few flaws. Since DeFi may eliminate a vast number of them and enhance the overall financial system, we are pleased to see the so-called DeFi Boom. Moreover, the barriers to entry are so low that anyone with a great idea for a new Dapp can simply implement it.
As most of the systems of our society undergo a transformation towards decentralization and digitalization, the demand for DeFi Dapps is likely to keep growing in the future. DeFi has all the chances to set the new standard for the modern financial sector. If the trend continues, the global economy will benefit immensely from the movement, and people around the world will enjoy lower costs, extreme accessibility as well as complete transparency and reliability. As for now, DeFi has provided us with a glimpse into more democratic and transparent financial relations. As for the future, we are looking forward to a shift from traditional financial products to the decentralized open-source ones.