What is Decentralized Finance (DeFi)
In this article, we will learn about what is Decentralized Finance, popularly referred to as DeFi, and how it is different from traditional finance.
Decentralized Finance
DeFi, or decentralized finance, is a system of financial products and services that exercise peer-to-peer transactions instead of relying on a central authority. It uses decentralized applications (dApps) to provide financial services without the need for an intermediary. DeFi apps are built on top of blockchains, which are distributed ledgers that allow for secure, transparent, and tamper-proof transactions.
DeFi is fundamentally a financial system that is independent of centralized authorities such as banks, governments, and other middlemen. This can lead to lower costs, faster transactions, and increased transparency.
In a decentralized network, users are able to conduct business directly with one another without the use of middlemen.
Traditional Finance and Its Problems
In a traditional financial system, everything happens through an intermediary. These intermediaries and central authorities are the primary channel through which financial resources are moved from suppliers of capital to people in need of capital. Let’s say you have $5000 saved up, and similarly many others have money in their savings. On the other hand, there is a business that needs $100,000 to grow its business. In a traditional setup, this job will be done by a bank. You deposit your money with banks in products like savings accounts and pension funds. Banks then lend this money to businesses that need capital. The bank makes money on the spread between the savings and lending rates.
Traditional finance is a system that has been in place for centuries. It is a system that is based on trust and intermediaries. However, this system has many problems.
One of the biggest problems with traditional finance is that it is centralized. This means that there is a small group of people who control the system. This can lead to corruption and abuse of power.
Another problem with traditional finance is that it is inefficient. It can take days or even weeks to process a financial transaction. This can be a problem for businesses and individuals who need to move money quickly.
Traditional finance is also expensive. There are fees for everything from opening a bank account to transferring money. These fees can add up, especially for people who are low-income.
