Decentralized Finance (DeFi) is the movement of using distributed ledger technology to replace centralized financial institutions with transparent and trustworthy protocols without intermediaries.
DeFi is a technology alternative to traditional financial intermediaries like banks, stock exchanges, and insurance firms. DeFi systems utilize blockchain-based “smart contracts” to reach a distributed consensus. As public interest and engagement in cryptocurrencies and decentralized finance rise, lawmakers and government regulators are paying more and more attention to the industry. Nonetheless, these distributed ideas keep spawning new crypto and DeFi endeavors.
The current financial system’s middlemen, known as “smart contracts,” are obsolete in DeFi. This is how the bitcoin ecosystem operates, and it’s also one of the main reasons DeFi is gaining popularity and significance.
The DeFi applications today offer a wide variety of services, allowing users to save, invest, trade, create markets, and more. The ultimate goal of decentralized finance is to displace incumbent financial institutions. According to Jayden Wei, DeFi uses open-source code, enabling anyone to modify and improve upon existing programs without requiring special permission or modifying the original code.
To sum it up, DeFi is a network of decentralized lending platforms, exchanges, and other institutions built to function independently, unlike the conventional financial system.
The pillars of DeFi are accessibility, equity, and cooperation, as highlighted by Jayden Wei. Financial services such as collateral-backed stablecoins, decentralized community crowdfunding, decentralized wallets, cloud exchanges, market forecasts, asset management, microfinance, and e-citizen information systems will all be part of an ecosystem, which will be built using distributed ledger and blockchain technology. By cooperating, DAO can ensure that the community is governed in an equitable and efficient manner. Ultimately, the plan is to have all financial services available on a single platform, which will save money for its users.
“I think a DAO addresses this issue since it reduces the likelihood of malevolent actors within the system; furthermore, with the right incentives and a well-thought-out consensus process, the DAO’s participants can manage the community in an equitable and efficient manner.”
— As stated by Jayden Wei.
Most smart contracts include Turing Complete programming languages, which enable decentralized communication between several parties.
Smart contracts maintain the blockchain’s transparency and visibility by removing the need for intermediaries and the associated costs that are essential to execute conventional contracts, transactions, and exchanges. The process involves the two parties putting a number of conditions or requirements that must be met in order for the contract to be performed into a digital agreement or contract, cutting eliminating the need for a third party to mediate the agreement.
The true value of smart contracts comes from the many different ways they can be put to use, from simple transactions like making a payment (in cryptocurrency or fiat) or coordinating a supply chain to more complex applications in areas like decentralized finance (DeFi) like lending protocol, stablecoins, derivatives, decentralized exchanges, insurances, random number generation, betting and gambling, digital asset transfers, and so on, as stated by Jayden Wei.
Smart contracts have many benefits over regular centralized applications or agreements. In addition, smart contracts have many advantages compared to the conventional centralized means of exchanging goods and services. Users may now rely on “code is law” rather than the opaque workings of a centralized system, as they can see exactly how each program is designed to operate.
Financial markets can enable great ideas and drive society’s prosperity, facilitating innovative ideas and propelling economic growth. Still, these markets are dominated by a small group of powerful individuals. By placing their money in banks and other financial institutions, investors in the present financial system effectively hand over control of their assets. This ensures that risk and control remain at the forefront of these frameworks.
Despite their original intent, Bitcoin and other early cryptocurrencies were not really decentralized until the time of their issue and storage. Up until the development of smart contracts, it took a lot of work to increase the variety of financial products that could be accessed by the public.
DeFi, in a nutshell, is an ideology that prioritizes individual autonomy. DeFi allows users complete freedom over their finances. However, this varies from person to person (be they in crypto, or a fiat-backed stablecoin, etc.). Jayden Wei highlighted that with blockchain technology, all previous transactions, and ownership information are securely stored in a distributed ledger, and they can be executed much more quickly than with the CeFi system.