Why Is Decentralized Finance (DeFi) Termed as "The Bank Of The Future"?

Decentralized finance, or DeFi, is a relatively new collection of blockchain-based financial services that is gaining traction and acceptability. Decentralized finance (DeFi) refers to a financial system that operates on a network of computers rather than a single server. DeFi is a new digital financial infrastructure that, in theory, eliminates the requirement for financial transactions to be approved by a central bank or government agency.

What Is Decentralized Finance (DeFi)?

Secure distributed ledgers, similar to those used by cryptocurrencies, are the foundation of Decentralized Finance (DeFi), a new financial system that utilizes these same technologies. Financial products and services are no longer controlled by banks and other financial organizations under this system.

Smart contracts, which are simple pieces of code that are published and performed on the blockchain, have enabled peer-to-peer value transactions to be completed programmatically depending on a set of conditions since the emergence of public blockchain networks like Ethereum. Decentralized applications, or 'dapps' for short, are applications developed with smart contracts and have been a major stimulus for the increased research of cryptocurrencies, or digital currency, for usage in industry. DeFi services, in reality, are dapps that use smart contracts and the decentralized features of public blockchains to deliver globally accessible financial services like:

1. Lending & Borrowing
2. Spot Trading
3. Asset Exchange & Swap
4. Savings & Yield Products
5. Stablecoins (Fiat-pegged cryptocurrencies)
6. Insurance
7. Prediction Markets
8. Arbitrage

How Does Decentralized Finance Work?

Blockchain technology, an immutable system that organizes data into blocks that are chained together and kept in hundreds of thousands of nodes or computers belonging to other members of the network, is the foundation of decentralized banking.

These nodes connect with one another (peer-to-peer), sharing information and authenticating transactions, commonly via proof-of-work or proof-of-stake. When a member of the network is needed to solve an arbitrary mathematical puzzle in order to add a block to the blockchain, the first term is employed, but proof-of-stake is used when users put some cryptocurrency aside as collateral, giving them a chance to be chosen at random as a validator.

Validators are rewarded with bitcoin as a reward for verifying transactions, in order to incentivize individuals to assist maintain the system working. Mining is a popular term for this activity, which has helped DeFi open up more prospects by removing central organizations like banks from the equation. In traditional finance, these services are exclusively available to huge corporations, allowing network members to profit. DeFi has also been able to reduce the charges that intermediaries charge by leveraging network validators, ensuring that management fees do not eat up a large portion of investors' returns.

What Can You Do With DeFi?

DeFi Applications Can Be Divided Into Three Categories:

Lending/borrowing: You can lend your cryptocurrency to a protocol like Aave or Compound in exchange for interest and/or prizes if you own it. You can also borrow digital assets from a protocol like this, which is especially beneficial if you want to make a trade. However, be cautious! Most DeFi protocols require you to put up more than the amount you wish to borrow, which means that if the asset's value drops too much, the protocol may remove your collateral to avoid losses.

Many DeFi users use this to generate assets by "yield farming," which is locking up funds in a pool of assets in exchange for rewards. Because rates differ by protocol and asset, expert yield farmers relocate their assets to take advantage of the best returns.

Trading: When you trade on a centralized exchange like Coinbase or Binance, you're relying on the exchange to take custody of your assets. Decentralized exchanges eliminate the middleman, allowing users to deal directly with one another. DEXes like Uniswap and PancakeSwap also allow users to list new coins for trading. The absence of verification raises the stakes, but it also allows investors to "get in early" on new assets before they enter the mainstream.

Derivatives: You don't always want to be restricted to exchanging specific coins or tokens. People can do more than spot trading with derivatives systems like dYdX and Synthetix. Users can, for example, leverage their transactions by betting more than they have or create "synthetic assets" that mirror traditional equities and commodities.

What Distinguishes DeFi From Standard Financial Services?

Instead of depending on an institution and its workers to first approve someone to use their service and then validate their transactions, smart contract(s) on a blockchain can be utilized to decentralize those obligations. This reflects a shift in the fundamental trust model for financial services from trust in an institution to trust in code run on a blockchain network protected by economic incentives among decentralized participants.

These open, decentralized finance applications provide a globally accessible and transparent framework for financial services innovation. In general, most DeFi programs share the following characteristics: With the introduction of public blockchain networks such as Ethereum, peer-to-peer value transactions may now be done programmatically depending on a set of circumstances using "smart contracts," which are basically bits of code that are installed and executed on the blockchain. Decentralized applications, or apps for short, are constructed with smart contracts and have been a major motivator for the rising research of cryptocurrency, or digital currency, for its usage in industry.

DeFi services are dApp that use smart contracts and the decentralized features of public blockchains to deliver globally accessible financial services such as:

General DeFi application features

Decentralized

Instead of centralized institutions, code serves as the sole middleman in the process. Changes to the code are typically done democratically through community governance vote.

Permissionless And Open

Access is open and borderless; whether you want to develop your own DeFi software or simply use an existing one, all you need is an internet-connected device.

Transparent

The code that controls the operation of the service is transparent to everyone on the blockchain, allowing users to independently check and/or audit the service.

User-Centric

Users can choose whether to access the service through their own bespoke interface or a publicly hosted one, and incentive models reward them for engaging in the service (e.g., supplying liquidity for lending).

Interoperable

Because of the shared blockchain network on which they exist, DeFi services are naturally compatible with one another; cross-blockchain interoperability networks will strengthen this phenomena when they are implemented.

Composable

With broad interoperability, a number of distinct DeFi protocols and services can be utilized in tandem to improve the user experience or as building blocks to create net-new applications that provide more value to users.

While the main attributes of DeFi may appear futuristic at first glance, the development and uptake of such services have already begun to increase. The tremendous expansion of DeFi in a short period of time resulted in tens of billions of dollars worth of digital assets trapped in various on-chain services ranging from lending, exchange liquidity pools, savings yield accounts and more. 

DeFi applications such as Uniswap and SushiSwap, for example, have transformed the way cryptocurrencies are exchanged; both are decentralized exchanges that allow users all over the world to swap and exchange a wide range of digital assets, such as ERC20 tokens, an Ethereum token standard for fungible tokens, in the Ethereum ecosystem. 

Both projects exhibit the aforementioned DeFi basic tenets at first sight. Anyone with an internet-connected device can audit the smart contract code that runs the aforementioned decentralized exchanges (DEXs), and both reward users to supply liquidity to trading pairs by providing them a part of trading fees accrued during operations. The programmability of blockchain networks like Ethereum is fueling continual innovation in the cryptocurrency / digital assets market as a result of services like these.

DeFi Has The Potential To Reduce The Worldwide Financial Inclusion Gap

While speculation drives most of today's attention and investment in decentralized technologies, the underlying value and impact of these technologies are vital. For example, due to a variety of obstacles such as economic i) under development, ii) poor infrastructure, iii) regulatory challenges, and so on, basic financial services are either unavailable or inadequate in many regions of the world.

Even in mature economies, one's socioeconomic class determines both access to and the quality of financial services available. According to a 2019 poll by the Federal Deposit Insurance Corporation, 22% of Americans are unbanked or underbanked, with substantial portions of that demographic having lower income or less education. With this as a backdrop, it is clear that the development and adoption of open, borderless financial services may contribute to closing the global gap in financial inclusion and opportunity.

Conclusion 

I hope this blog gives you a clear insight into how DeFi replaces today's centralized finance with its unique features like Permissionless and open, Transparent, User-centric, and  Composable. DeFi will enable every product or service to become autonomous. It's going to be an exciting moment! Financial and economic services will run on distributed ledger technology in the near future, which is a decentralized database administered by various members and users without a central administrator. Like other entrepreneurs, if you want to reap the benefits of this opportunity. You need to contact the best DeFi development company which have a team of blockchain expert and has already done many projects on time without any delay.