Background of Decentralized Finance
People have been exchanging commodities for goods. Together with the growth of humankind, currency importance roused up. Currencies were invented that makes it easier for the people to start with trading. Different financial authorities and institutions established their goal to regulate the supply of currencies and its circulation. With the rising importance of this financial system, the power of both institutions and authorities increased quickly. People put their trust with different banks to both invest and store money. On the other hand, banks also benefit with the savings they are managing with the exchange of a small interest. That is why Decentralized finance becomes a hot topic. In this article, we will discuss what is DeFi or Decentralized Finance.
Decentralized Finance is embraced with tools that let users lend, trade and barter crypto assets securely. Services like this are now considered as independent building blocks. Decentralized Finance popularly known as DeFi represents digital assets and different financial smart contracts. It is mostly built with Ethereum grid. DeFi plays the role of financial instrument in a decentralized manner without any other directing body. It allows people to have full access with their assets and gives them options to upgrade it in a different network. Blockchain eliminates the need of 3rd parties because it allows everyone to check and verify each transaction. DeFi’s growing name leads to its faster development and innovation.
Currently, the majority of financial services are now centralized. There are entities and institutions that have control over it. Money and savings are held by banks with large numbers or groups of people. Banks are very convenient but in times of emergency, bank withdrawals are the one that you should not depend on especially when the account freezes or worse, the bank collapses and their authorities fail to meet their obligation. Decentralization made a huge contribution in solving this problem. Many people cannot have bank accounts. Decentralized Finance solutions become their aid to join the banking community. Decentralized Finance projects are being created and development keeps arising.
Pros and Cons of Decentralized Finance
* Decentralized Finance changes the basic structure and manner of finance as it takes the place of corrupt centralization with blockchain technology. DeFi becomes more competitive and innovative before it reaches the top financial system. Flick through to more about the pros and cons of Decentralized Finance as it currently stands.
Pros of Decentralized Finance
- Blockchain network provides full access, control and transparency that makes each user see what is happening about their assets. Smart financial contracts will be permanent once it is deployed to the blockchain party.
There’s no need to have a middle man which makes
it possible for everyone regardless of their credit history.
There’s no central authority that has access with your assets. You have the full control of what you save up.
It is very convenient because it is running constantly, day and night world-wide.
Decentralized Finance solution is much cheaper than the centralized counterpart. Intermediaries are all eliminated, so transaction costs are reduced.
Currency is much better than banks when it comes
to investments because it is loaned with interest and consent while the banks
are legally able to loan it out for profit without asking any permission from
the account holder. In DeFi, the account holder or user earns the interest the
bank would usually keep.
Cons of Decentralized Finance
- It is up to once scope of knowledge on how they can use their platform responsibly. It is only the account holder who has responsibility to do the research for their own good and benefits. It is very important to ensure the safety of your digital assets. The owner has the great responsibility with the power that they have.
- The performance of its network is sometimes slower than the centralized one. Hacker attacks can also be possible especially if you do not ensure the security and safety of your digital resources because there is no middle man or body to verify the activity of every user.
Aside from having the knowledge about its advantages and disadvantages, it is also needed for you to learn more about its ecosystem.
There is an Institutional DeFi protocol called Apex DAO that keeps true decentralization through a transparent and unbiased model. It features the ecosystem model of its financial solutions. Apex DAO set to solve issues by crowdsourcing process. This ecosystem operates with layer structure. Here’s a brief description for three layers.
DeFi Layer- This layer is described as the first and lowest layer of the ecosystem. It works in combination with a side layer to provide users with the chance to gain profit through yield farming and asset management. With further approach of assets and resources management services, it will maintain an investment portfolio on part of institutional investors. It is generated by the Governance Voting System.
Crypto Fund and Corporate Loan- This is the second layer of the ecosystem that features lending protocol for both individuals and businesses. In this layer, the account holder will deposit their crypto asset by the manager. This asset can be used as collateral to invest in crypto currency manner.
Special Purpose Acquisition Company (SPAC) - More Special Purpose Acquisition Company will be created when crypto fund and corporate loan increases its value. In this layer, you can earn revenue in a short span of the timing process. Investments from both institutional and private investors are a huge part of the layer because it ensures the security of resources and enables them to keep the access and control over their crypto holdings.
CPMM- In this layer, the received assets are directly proportional to the supply of the tokens.
On-Chain Governance- This will help users to unlock the full cost of their crypto assets and access both financial products and services in a very secure and decentralized environment.
Blockchain currency operations are continuously accelerating. There are a lot of companies developing other currency platforms especially when its blockchain based that fits decentralization. The adaptation of blockchain technology like DeFi let the world be characterized with wider global access to such digital financial service development.