One of the areas in cryptocurrencies which is gaining a lot of attention is decentralized finance, also known as DeFi. It is related to the financial services that utilize smart contracts for agreements. With these automated agreements, the need of intermediaries vanish away. And blockchain technology is used in place of players like lawyers and banks.
Disruptive Financial Technology
When we talk about DeFi, it is built on the Ethereum blockchain network and it appears to be a revolutionizing factor in disruptive financial technology. Decentralized applications (dApps) are used in crypto trading via decentralized exchanges.
The most important thing about it is that it is peer-to-peer completely. There is no organization or any governing body that provides this platform.
DeFi services helps you to
– Using platforms like Compound, you can earn through interest by borrowing or lending cryptocurrencies.
– Betting on the results of different events using Augur.
– Establishing derivatives of real assets such as currencies or valuable metals on Synthetix.
– Buy cryptocurrencies like stablecoin which provide a fixed value for any product
More about DeFi
At times, DeFi is called Lego money. The reason behind is that you can stack dApps together to maximize your profits. For instance, you can purchase a stablecoin and lend it to someone on Compound for earning interest.
Applications in the future may impact greatly on our daily lives. For example, you may be able to buy a house via the DeFi platform under a mortgage agreement where you repay a certain amount of money over a period of time.
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Why the eagerness?
The primary reason is that you do not need to know each other as you are required to know in traditional lending. DeFi has no such requirements. In spite of this, everything is based on mutual trust and protecting each other’s privacy.
Regulators have to balance the innovative technologies and the risks of putting money in an unregulated place like banks. It is somehow sensible to accept the change. As we have seen, the US Securities and Exchange Commission embraced DeFi by acknowledging an Ethereum-based fund called Arca for the first time ever.
Another reason is the inclusion of mainstream players in DeFi. Many financial institutions that are considered giants are beginning to accept DeFi and find ways to participate in that. We can check the acceptance by the fact that 75 of the World’s largest banks are using blockchain technology to accelerate the payment procedures.
Significant asset management funds are beginning to take DeFi seriously. The example of Grayscale is important here that is the world’s biggest crypto investment fund. The first half of 2020 showed that it was managing US$5.2 billion of crypto assets, containing US$4.4 billion of bitcoin.
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The third reason is obviously the impact of COVID-19. The pandemic has lowered down the interest rates. The world has seen a point where economies come to a halt. In these times, DeFi offers better returns to savers as compared to major institutions. For instance, Compound offers 6.75% of annual interest rate to those who have saved a stablecoin Tether.
Lastly, the reason why people are investing money in DeFi tokens is to reap the advantages of its exponential growth. They do not want to feel left out and miss the opportunity. We are undoubtedly moving towards an increasingly decentralized financial system. The most crucial aspect is to make its development secure in order to mitigate the risks attached to it. This is the challenging situation in the years to come.
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