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How Decentralized Finance Could Help You Grow Financially?
Decentralized Finance or DeFi is a new age Technology's application in financial services is not new. Nowadays, technology is used to complete the majority of transactions at banks and other financial services organizations. However, technology's function is limited to that of a facilitator in such transactions. Companies must still navigate the legalese of several jurisdictions, competitive financial markets, and differing standards in order to complete a deal.
DeFi is a mechanism for making financial goods available on a decentralised blockchain network that is open to the public. As a result, instead of going via intermediaries like banks or brokerages, anybody may utilise them. Unlike a brokerage or bank account, DeFi does not require a Social Security number such as Aadhaar Number, government-issued ID, or address proof.
DeFi, with its stack of standard software protocols and public blockchains on which to construct them, puts technology at the forefront of financial transactions. DiFi is a true disruptor. One of the most significant advances in the growing digital economy might be decentralised finance. It has the ability to change the way money is exchanged.
What makes DeFi important for the financial sector and individuals?
- In comparison to the old financial system, DeFi allows individuals to keep more control over their assets and gives them the financial freedom to select how to invest their assets without relying on an intermediary.
- Business-to-business relationships will be impacted by DeFi. As more institutions join the blockchain ecosystem, and the tokenization of financial assets like derivatives and equities matures, smart contract-based solutions will become more viable.
- The tokenization of real-world assets on public blockchains will be another area of disruption. Historically illiquid assets, like commercial real estate, would be represented as tradable fractionalized tokens on a public blockchain, allowing corporations to gain liquidity.
How different DeFi is from traditional finance?
DeFi varies from traditional finance perhaps not in terms of the services it attempts to give, but rather in the manner in which it does it. Each row in Table 1 represents a distinct service, which is divided into three categories: trading, loan, and investing. This section compares the underlying processes of CeFi and traditional finance with the fundamental building components of both services.
Below are the major difference between DiFi and the Traditional Finance:
| Comparison | DeFi | Traditional finance |
|---|---|---|
| Money holding | You are the incharge | By the companies |
| Control over money | You control where it goes and how it's spent | Trust companies not to mismanage your money |
| Transfers of funds | happen in minutes | Payments can take days |
| Transaction activity | Pseudonymous | Tightly coupled with your identity |
| Who can open | Anyone | Need to apply to use services |
| Market Activity | Always open | Markets close |
| Transparency | anyone can look at a product's data | Financial institutions are closed books |
DeFi's components are similar to those of existing financial ecosystems in that they require stable currencies and a diverse range of use cases. Stablecoins and services such as crypto exchanges and loan services are examples of DeFi components.
The opportunities with DeFi
DeFi is still very much in the early phases of development, and institutions will play a key role in shaping the ecosystem. By exploiting the current DeFi ecosystem and infrastructure, revenue opportunities, such as new services and products, as well as operational efficiency, may be realised. As this new financial ecosystem evolves, institutions that are able to adapt and embrace these developments will see tremendous growth potential.
DiFi is a serious disruptor, but mainstream adoption will take 3-5 years. More education and time are required for the general population to get acquainted with the concept. Organizations should look at the potential and hazards that DeFi presents.
