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What is Decentralized Finance (DeFi) ?

DeFi or Decentralized Finance is nothing but an ecosystem of financial applications. The only difference between the traditional financial applications and DeFi applications is the platform where they are built. DeFi applications are deployed on top of the blockchain networks.

Since built on blockchain, DeFi applications inherit the desirable characteristics of blockchain. DeFi applications are trustless and permissionless. In layman's terms, DeFi applications are open source and transparent, which can be easily accessed by anyone due to the lack of centralized governing authority. The decentralized applications (Dapps) function based on a peer-to-peer (P2P) mechanism, where the application users can enjoy complete control over their assets and can interact with the application without having to place trust in anyone.

DeFi is the hottest trend right now in the crypto and blockchain arena. This article will give you a good understanding of what DeFi is and how it works.

What are the core benefits of DeFi?

DeFi gives easy access to financial applications to people who are unbanked or who are from underdeveloped nations where the population is isolated from traditional financial systems. DeFi articles built on a modular framework as a result of which they exhibit a high level of interoperability. This will create entirely new financial services, products, and markets where finance is affordable to everyone in the ecosystem.

The traditional financial applications are dependent on centralized intermediaries like banks or other third-party payment processors. Also, the arbitration has to be provided by the courts. But DeFi, on the other hand, is independent of any intermediaries or arbitrators. The disputes are resolved in an efficient manner by the code and the user has complete control over their funds throughout. Thus, DeFi applications are capable of providing a cheaper and frictionless financial system.

The ultimate aim of the DeFi apps being deployed on top of blockchains is to avoid the single point of failure. The data is recorded on every single node on the blockchain network and is widely distributed. This makes the potential shutdown of a system almost impossible. In the case of traditional financial applications, the data is stored in a centralized fashion i.e it is stored in a single location which becomes the hotspot for hackers to tamper or alter the data.

The frameworks for deploying the DeFi applications can be built in advance, and this makes the deployment of such applications much less complicated and secure. Due to the absence of profit-minded intermediaries, even low-income individuals can be benefitted from a wide range of financial applications.

DeFi significantly differs from open-banking

Open banking is nothing but the current banks where the financial service providers are allowed to access the financial data through APIs. This is nothing but the mere leakage of data from a banking institution to the non-banking one. Also, this makes the system complicated by bringing in new products and services.

DeFi is completely different and it does not depend on the current financial infrastructure. DeFi is also called open finance. Decentralized financial systems never let the data out and are completely autonomous and provide people, a new horizon of interacting with financial applications.

Closing thoughts

Find out more about the use cases of DeFi here. DeFi will shift the power from centralized organizations to the individual. This is where the success of finance and investment lies. The mainstream adoption of DeFi will undoubtedly disrupt the way in which traditional finance work and create an efficient system.