DeFi and Cryptocurrency as the Future of the Financial World

DeFi and Cryptocurrency as the Future of the Financial World
Photo by Leeloo Thefirst: https://www.pexels.com/photo/white-smartphone-on-the-table-7887847/

DeFi is a financial instrument in the form of services and applications created on the blockchain. Its main goal is to become an alternative to the banking sector. In addition, the instrument aims to replace the traditional technologies of the current financial system with open-source protocols. That is, to provide a large number of people with access to decentralized lending and new investment platforms.

What Are the Components of DeFi?

There are several DeFi components. First of all, these are blockchains, distributed ledgers for recording transactions. Currently, most DeFi services operate on the Ethereum network due to its capabilities and high popularity. However, DeFi activity is growing on other blockchains as well. Digital assets are another part of DeFi. They represent value that can be traded or transferred on the blockchain network.

Wallets are the next component. These are software user interfaces for managing assets stored on the blockchain. They are usually used if the user conducts various crypto transactions—for example, exchanges 0.6 ETH to USD, BTC to ETH, etc. A non-custodial wallet gives the user complete control over funds through private keys. In the case of using a custodial wallet, private keys are managed by the service provider.

Smart contracts are another essential component of the ecosystem. It is a blockchain-based software code that executes, controls, and documents the appropriate events and actions under certain conditions and rules.

DeFi also includes stablecoins. These are digital assets with a value pegged to a fiat currency, a basket of fiat currencies, or other assets with a stable value.

Key Benefits 

There are a number of important DeFi benefits:

  • Flexibility and speed. You can make transactions and transfer your assets anywhere. There is no need to wait for bank transfers or pay bank fees. What’s more, transactions are real-time, and interest rates are updated multiple times every few minutes;
  • Accessibility and no boundaries. One of the main DeFi advantages is easy access to financial services. DeFi services can be used by anyone with a crypto wallet and internet access;
  • Transparency. DeFi data is hack-resistant, secure, and verifiable, thanks to blockchain technology. Every transaction on the blockchain can be viewed and verified. So, it is absolutely safe to swap 0.0001 ETH to USD or any other currency;
  • Complete control over assets. DeFi applications do not require intermediaries or arbitrators. Users can fully control their funds within the ecosystem through non-custodial cryptocurrency wallets or an escrow service based on smart contracts.

Application in the Financial Sphere

DeFi is an alternative to the traditional sector. Transactions are conducted in this system through open blockchain networks. This eliminates the need for the intermediation of centralized service providers (custodians, central clearing houses, or escrow agents). Smart contracts perform their functions.

In the field of decentralized finance, smart contracts are mainly used to conduct atomic transactions. These include exchanging one asset for another and securing liabilities through escrow accounts. In both cases, the movement of assets is subject to the rules of the smart contract. And the operation is performed only if predetermined conditions are met.

Using these properties, decentralized finance mechanisms can reduce counterparty default risk. Such mechanisms can replace many traditional financial services while eliminating the role of intermediaries and operators of centralized platforms. This reduces costs and the likelihood of errors. Here are just a few examples of where these mechanisms can be applied:

  • Credit markets;
  • Exchange protocols;
  • Derivative financial instruments;
  • Asset management protocols, etc.

Therefore, DeFi technology is indeed the future of the financial market. It aims to improve the traditional financial system. It enables the creation of more open, free, and fair financial markets accessible to everyone today.