WHAT IS DE-FI?

You must’ve heard the term De-Fi thrown around like confetti in conversations on Web3. But what does it mean?

Now, the term decentralized simply means that there is no centralized party either in the middle or on one of the ends usually to manage things, run things, operate things, to take care of trust to be exact. So in blockchain, a lot of people, especially who are building in blockchain, talk about ‘Don’t trust, Just verify!’

That simply means that there is no centralized party that either of the parties have to rely on when it comes to trust. This new financial system called decentralized finance (DeFi) is built on safe distributed ledgers that are comparable to those used by cryptocurrencies.

De-Fi does away with the usage fees that banks and other financial institutions impose. Anyone with an internet connection can use DeFi, and users can store money in a safe digital wallet and transfer money quickly.

In centralized or traditional finance, banks and other third parties hold the funds and enable the transfer of funds between parties; each party charges a fee for its use. An acquiring bank receives the card information from the merchant and passes it on to the credit card network to complete the credit card transaction.The network authorizes the charge and asks the bank for payment. Because retailers typically have to pay for the usage of credit and debit cards, each link in the chain is paid for the services it provides.

Centralized finance oversees all financial activities, including loan applications and local bank services.

And if we were to take the traditional finance system and convert it into De-Fi, we’d just take out the bank from the middle, replace it with smart contracts, based on blockchain, powered by cryptography.

Now what does that mean?

That means smart contracts which are self-executing, immutable, and transparent, so we can go and verify how valid that contract is, and if you’re going to get scammed or not. So we, instead of trusting, verify things on our own. And at the same time, they’re powered by blockchains and crypto, so practically, not a lot of people on this planet are going to be able to hack into those contracts, and steal those funds. And since all of that information is on blockchain, there’s immutability there as well. So, that would be a de-fi setup.

A classic advantage of this system over the traditional finance is of course, because there is no middleman, the fee associated with these kinds of transactions, is minimal. The world of decentralized finance is always changing. It is unregulated, and its ecosystem is full of frauds, hacks, and infrastructure errors.

The current legal framework was developed with the idea of distinct financial jurisdictions, each with its own set of regulations. The ability of DeFi to conduct borderless transactions raises crucial issues for this kind of regulation.