All about Decentralized Finance and how it acts as all-encompassing umbrella term that describes the enablement of financial services on public blockchain cryptocurrencies like Ethereum.
Decentralized Finance or DeFi is an all-encompassing umbrella term that describes the enablement of financial services on public blockchain cryptocurrencies like Ethereum.
To understand DeFi, we must first understand blockchains, the underlying technology behind cryptocurrencies. Underneath the meticulous architecture of a blockchain, is the basic concept that control is distributed across nodes instead of in one location. Blockchains are inherently secure and free from the influence of any individual or company.
One of the biggest advantages of a blockchain-based cryptocurrency like Ethereum is that it is free from the whims of banking institutions. All policies are implemented through smart contracts across all nodes on a blockchain. However, there is a downside in that DeFi subscribers don’t have access to traditional banking services like gathering interest, borrowing, lending, insurance, trade derivatives, assets, securities investments, billing, etc.
To address that situation, we have DeFi, a means of enabling traditional banking without compromising on decentralization. The added advantage of being on a blockchain is the speed. The registration, onboarding, and starting process takes about as much time as it does to set up a new email account. With DeFi, you are free to transact globally exclusive of any interbank rates, pseudonyms, or sign-up limitations.
The groundwork laid by Bitcoin, which is the first-ever, and most valuable digital cryptocurrency (despite market crashes) is the basis of DeFi’s expansion. The idea wasn’t just to create a valuable digital asset to trade online, rather the idea was to create an alternative to Wall Street, where decision-making is controlled by a handful of people. There was more to it than mere altruism, DeFi would handle trillions of dollars without any of the costs associated with Wall Street, such as rent, salaries, or infrastructure.
This means anyone, anywhere in the world with stable access to the web can have just as much access as anyone else with no exceptions or limitations.
Accessible: You are not required to apply, pass through some legal loopholes, or face any such red tape when opening an account. The process is as simple as making a wallet yourself and everything else automatically falls into place. You can start posting under a pseudonym without even submitting your real name, email address, or any personal information. You can move your assets wherever you want, whenever you want, without having to ask for permission, wait for lengthy transfers to conclude, or pay exorbitant costs. Flexibility is provided by the platform.
Efficient: DeFi interest rates and rewards are updated quite frequently. Sometimes as frequently as every 15 seconds, which is much more frequent than on Wall Street. On top of being efficient, DeFi offers greater transparency as well. As all parties involved will have a complete set of transactions, as will anyone else. There will be no risk of tampering or allowing a single party to leverage the platform for personal gain.
Transparent: The purpose of a ledger on a blockchain is that all attached nodes have the same information as everyone else. When a transaction takes place on one node, it automatically appears on all the other nodes simultaneously. This means all parties involved can view the complete set of transactions. Private corporations can only grant this level of transparency by choice, it is not part of the design.
Users interact with DeFi most frequently through pieces of software known as dapps (short for “decentralized applications”), the vast majority of which are now hosted on the Ethereum blockchain.
There is neither an application to be filled out nor an account to be opened, in contrast to a traditional bank.
People are interacting with DeFis in all sorts of ways, some of which are:
Lending: Traditional banking offers interest and rewards every month. DeFi lets you lend out your crypto and earn interest and rewards as frequently as every minute.
Acquiring a Loan: Traditional banking requires a tonne of paperwork before loans can be issued. With DeFi, you can acquire flash loans that work without any paperwork and are available for extremely short-term lending. This level of service is not available through traditional banks either.
Trading: Just as you can use traditional banking to invest in stocks, you can make peer-to-peer trades with certain crypto assets without resorting to any sort of brokerage.
Savings: The biggest advantage of a bank is the ability to save, it is why banks exist in the first place. You can put some of your cryptos in a savings account (or its alternative) and earn higher interest rates than you would get from a physical bank. On top of that, you also stand to watch your savings grow if they are in the shape of cryptocurrency.
Being that this technology is in its infancy, there will be numerous drawbacks. The most critical of which will be the lack of regulation. Even though DeFi and all blockchain are designed to be counter-intuitive to regulation, as it is self-regulated, there still needs to be some form of regulation, or at least standardization to make things more official.
Also, all cryptocurrency is subject to market response and that is the bottleneck in this platform’s reliability. Due to the unpredictable nature of the transaction rates on the Ethereum blockchain, active trading can quickly become prohibitively expensive.
Your investment could be subject to considerable volatility depending on whatever decentralized applications (dapps) you use and how you use them.
Another problem is tax regulation. While the blockchain is a great tool for democratized financial management, one has to cash out at some point and the laws of the land you live in will have taxation requirements and you will need to abide by them. This enforces users to keep and maintain their tax records.
Through DeFi, you may avoid the dangers of centralized data and safeguard user privacy by using credentials that can be reused and verified.
Users can generate and manage their own unique digital identities, as well as attach personal data that is validated by reputable third-party data attestor services.
This information is then converted into tamper-proof “verifiable credentials,” which the user is then able to readily exchange with businesses for identity verification or risk assessment. All of this takes place without the user’s raw data being exposed.
Make risk assessment possible and go beyond the practice of collateralized lending by using credentials that can be reused and verified.
Utilize non-conventional data signals such as social connections, income verification, bank statements, and the history of utility bill payments (coming soon), in addition to standard credit scores (coming soon).
OnRamp also supports the WACI specification, which enables the capability of requesting third-party credentials from the user and helps unlock unique global use cases.
Easily enable Know Your Customer and Anti-Money Laundering checks with Bloom without compromising user privacy.
Identification document verification, sanction screening, and politically exposed person screening are all examples of available verifiable credentials that can be reused.
We create transparency for a global economy built on blockchains.