What Is DeFi Crypto? Decentralized Finance (DeFi) Explained for Beginners
Decentralized finance, or DeFi for short, is a term that’s starting to pop up in more financial circles. As the name implies, it’s finance that doesn’t rely on a central authority. This means there is no intermediary, such as a bank, between the lender and borrower. Instead, an individual who needs money can borrow it directly from another individual or group who has extra funds available.
But DeFi is so much more than simple peer-to-peer lending, it promises a future with greater efficiencies and lightning-fast transactions. A future where the average consumer isn’t taken advantage of from a financial institution that is simply looking to make a profit. But rather, DeFi will be a secure system, based off algorithms that will assess risks appropriately, and democratize personal finance to the point where regardless of your social status all will be able to partake.
These are big promises, and certainly some are skeptical. How will this be any different than our current financial system? Isn’t my money already digital? Will it be truly decentralized? Are all common (and valid) questions people are asking when trying to understand what decentralized finance offers.
What is DeFi?
To truly understand what DeFi has to offer, we must first understand what it actually means. And with this in mind, DeFi is an emerging financial technology where centralized financial institutions (think banks, central lenders, etc.…) will be replaced by algorithmic and AI powered distributed digital ledgers.
More specifically, this new technology will store financial information on a distributed database that will not be overseen or governed by any single entity. Users will be able to access financial information faster and more securely, as well as be able to lend, trade, borrow, and manage their finances from their fingertips.
And through this decentralized system, will allow individuals regardless of who or where they are to have access to critical financial services and products. This new decentralized system promises to be more secure, as data is spread throughout an entire system. As well, accessibility will skyrocket as there will no longer be gatekeepers determining who may have access to basic financial services.
The technology DeFi relies on is the same as what popular cryptocurrencies use. As blockchain technology allows for security, distribution, and speed that traditional technologies are unable to support.
What Will Decentralized Finance Look Like in the Future?
The reality of DeFi is that it will likely take decades to completely remove traditional financial institutions. However, there are some exciting changes happening right now that will likely fundamentally change how we live and work in the near future.
The first change will be the speed and efficiencies of various transactions. A key component of DeFi is for blockchain technology to support transactions. Which is something that our current system could implement relatively quickly and easily. What this would mean is that transactions that, in the past, were expensive to make and slow to process would happen instantaneously, allowing consumers to enjoy a significant reduction in fees charged.
The second, is implementing a properly backed stablecoin. This would provide the initial framework needed for peer-to-peer lending, where individuals could loan out their digital currency to others in need and earn interest while doing so. This is already quite common within the crypto space, however, having an official properly backed stablecoin with sufficient reserves would provide some much-needed credibility to the space, as well as a common currency for the wider population to adopt.
Lastly, is decentralized finance having the ability to make a more secure and trustworthy financial system. Many think blockchain technology supports corruption, however, this is actually an opportunity to create a more accessible and visible system than ever before. By storing financial data on a secure (and public) ledger would substantially increase the ability for governing bodies to oversee markets, as well as significantly increase the difficultly for individuals to commit fraudulent activities. Blockchain technology relies on programs and algorithms, not humans, to make decisions and as long as the system is designed with transparency in mind should create a more open, honest, and accountable financial world.
Always understand the tax consequences of your crypto transactions including DeFi. Have a crypto accountant on your team to avoid tax mistakes and mitigate your tax burden.
Long Road Ahead
Defi promises a new world, where everyone has access to simple financial products like credit cards, loans, and bank accounts. The system would be based on blockchain technology, where information is stored on distributed ledgers. Money would soon become programmable and mass efficiencies would be realized bringing down the cost for consumers. Populations would no longer carry paper currency, rather they would have DeFi wallets, where their information and net worth is stored digitally. Exchanges would become automated, as there would be no single entity overseeing them.
Decentralized finance has a long way to go before all this happens. But the world is on the right track and there have been incredible developments within the DeFi movement. There will undoubtably be hiccups and mistakes along the way, however, the promise of DeFi and the opportunities various DeFi technologies present is simply too great to ignore.
As DeFi continues to drive innovation and more of the population realizes the advantages it presents, decentralized finance has only just begun to change our everyday lives…… for the better.