DEFINING DEFI

Decentralized Finance is a state of the art, completely automated financial system based on the blockchain system that has been built to oppose the current, centralized, ”banking” way. But before we dive into what exactly DeFi is, we need to ask ourselves,

What’s wrong with the current system?

You don't really own any money that you have and are subject to rules and policy changes made by the regulating authorities, thus giving you very less precedence over your money.

Now that we know exactly why we require a newer system of financing, let’s take a look at the

Fundamentals of DeFi

1. Decentralization

Perhaps one of the biggest advantages DeFi has over banks is that, well, as the name suggests, it’s decentralized, therefore, no powerful people can change policies to their liking and there are no hidden costs or payments because it's all code, out there for everyone to see. So, instead of having to trust banks, a new trustless network is formed.

2. Stable Coins

Imagine you wanna trade in some cryptocurrency, say bitcoin, well, the centralized way of doing it would be using some exchange and receiving money in the bank. But in the volatile world of trading where you can make it or break it in seconds, taking so much time per transaction is simply not enough, not even counting the cost of every transaction taken by all the parties involved. Here, stablecoins provide a way around a problem by combining the liquidity of a cryptocurrency, to the stability of a fiat currency, hence easing the transaction process while also cutting down on costs.

3. Smart Contracts

These are also basically computer code that get executed when the conditions are met. Now the uses of smart contracts are extensive, from flash loans to margin trading to even insurance, they can be used anywhere and everywhere and ensure that no party is cheated into or out of an agreement. Oracles are used to provide smart contracts with the information about whether the conditions have been met or not and provide an edge over the traditional way as they are free of exploitation and, once a smart contract is issued, the conditions are immutable, that is, they cannot be changed.

4. Decentralized Exchanges

Let's consider a hypothetical situation where we travel to some other country, now, to transact in that country, we require that country’s currency and for that, we require forex exchanges, but what we don't know is that forex exchanges issue very high rates of interest for exchanging our currency. This is where decentralized exchanges come into play, allowing us to exchange most currencies for negligible rates of interest. What’s more, since it’s all code, the rate of interest cannot be changed unlike centralized exchanges where they can be changed to the liking of the authority.

Through all this we can obviously see that DeFi provides some really interesting advantages over CeFi, like lesser costs, a trustless system and lesser regulation but should we really be changing our current ways? That is the question.

Should we be skeptical?

A few days ago, hackers exploited the Wormhole DeFi for an amount on the ups of $320 million, and that is seemingly how the biggest advantage of DeFi platforms are also their biggest disadvantage. Computer code is immutable, but also contains loopholes, which can be easily exploited once found out.

Therefore, although DeFi can be a great technology for the future, it requires a lot of improvement to be of significance in the real world.

Signing Off
Ansh Kanotra