The Finance Sector is Transforming – What is Decentralized Finance (DeFi)?
Decentralized Finance, or DeFi for short, is a financial technology closely related to cryptocurrencies. It’s an emerging technology that works on concepts similar to the secure distributed ledger systems in cryptocurrencies. However, DeFi’s purpose is to remove third-party involvement in crypto or other transactions.
What is Decentralized Finance (DeFi)?
In simple words, DeFi is a prospective technology that removes institutions’ and central banks’ control over financial products, financial services, and money. Here’s how DeFi updates the finance sector:
- Fund transfers that take only a few minutes or seconds
- Store wealth/money in digital wallets instead of banks
- Removal of bank and institution fees from the equation when you’re using financial products/services
- It only requires an internet connection and works on micro-level
How Does DeFi Work?
Connected to cryptocurrencies and using identical distributed ledger systems for safety purposes, DeFi operates on blockchain technology. Blockchains are secure distributed ledgers or databases. dApps (Decentralized Applications) allow users to handle blockchain transactions.
What happens in a blockchain which is a database for digital transactions? In a blockchain, transactions are recorded in identifiable blocks. After storing them, users verify them through verifiers suitable for the process.
If the verification is successful, users close and encrypt the block to move to a new one. The latest block that’s formed contains the information about the previous blockchain block that contains transaction info.
DeFi improves overall speed and efficiency while reducing errors and risks using the exact nature of blockchain transaction processing.
Future Concerns Involving Decentralized Finance
Decentralized finance could be instrumental in creating a new landscape for the financial sector. But since it will lead to unregulated financial transactions and fund transfers, various security concerns have caught people’s attention. There are countless infrastructural hacks and mishaps in the DeFi ecosystem.
Modern-day laws and regulations oppose the DeFi ecosystem. The former imposes that each financial jurisdiction must have its own rules and laws. However, DeFi shows a future with borderless transactions, which severely threatens the current regulations.
People are left wondering, who’ll be responsible for inquiring about a borderless financial crime occurring through DeFi apps and protocols? The open and distributed nature could invite countless scams and fraud schemes.
· DeFi Concerns Other than Security Factors
The use of blockchain technology, installation of computing power, and constant usage could leave a higher than expected carbon footprint on the environment. And since it’s blockchain-based, the DeFi systems will require timely updates. Otherwise, the whole ecosystem could become inefficient and unsafe.
DeFi aims to use blockchain technology and improve transaction processing online. With the help of DeFi, online payments and fund transfers can become faster, more efficient, and less sophisticated. Furthermore, it can potentially reduce transaction fees imposed by banks and institutions. Since the DeFi infrastructure and regulation are under development, it hasn’t progressed to mass adoption worldwide.