Decentralized Finance is essentially a middle ground between the existing centralised financial system and totally decentralised cryptocurrencies like Bitcoin and Ethereum. It is an open-source, decentralised, and immutable database based on blockchain technology with multiple levels of cryptographic protection for its users. Decentralised finance is a system on which regular financial applications can be created but with decentralised functionalities and contains open-source and incredibly adaptable codes. Anyone can customise the dApps to meet their needs and safely integrate third-party functionality.
Decentralized finance is a powerful invention with a wide range of applications. The most groundbreaking ones are listed below.
Non-cash assets with high liquidity:
Tangible resources such as real estate properties, jewelry, and art, for example, have poor liquidity in the current financial structure because they can't be readily transformed into other assets. In a centralised system, you use cash to trade them, while in a decentralised system, they can have a digital value assigned to them, or can be "tokenized." With this newfound digital value, these non-fungible assets now become free to be sold, borrowed against, or be invested in by anyone in the network.
Furthermore, once a physical commodity has a quantitative score assigned to it, it can be thought of as an abstract being that can be broken into sub- pieces, each of which can have a smaller value than the whole. This serves two purposes -
- Investment in reduced portion: A single physical asset can now be split into pieces and invested in different forums. This not only provides convenience, but it also opens up a greater choice of investment options for a single property.
- Inclusivity: Lower-income people who previously couldn't purchase the entire asset can now buy and sell smaller chunks, allowing them to participate in the investment game.
Borrowing and lending with no restrictions:
In a decentralised system, the principle of loan and debt is the same as it is in the current centralised system: users accumulate their money exactly like they do now in banks, and they can receive interest on their deposits when someone else borrows them. The distinction is that you can deposit and therefore invest any of your commodities, ranging from digital currencies to real-world physical assets, or even a proportion of the latter, as described in the preceding point.
Furthermore, in this scenario, smart contracts handle the pronouncement and confirmation of the loan terms, as well as the link between the debtor and creditor and the allocation of interest. Hence all this is electronically performed, with no human intervention from start to finish, making it secure and completely unprejudiced. There are several advantages to using this technique-
- Speedy settlements: Payments will be fast in a decentralised finance ecosystem.
- More choices for collateral in a loan: You can use your digital assets as security instead of your physical property when taking out a loan, keeping things protected in the event of a financial calamity.
- Improved adaptability: As previously indicated, all assets in a DeFi system can be standardised with a single digital value. As a result, substantially more interoperability of financial services across multiple providers and platforms will be possible. This will lessen the turbulence that currently exists as a result of the centralised system's inflexibility.
- Again, inclusivity: DeFi does not demand a sequence of documents or a credit check in order to borrow, allowing more people to benefit from the possibility of a loan.
- Democratic borrowing: As more people from all backgrounds enter the investing market, lenders will have access to a larger pool of debtors, which will only improve their operation.
Marketplaces that are open to all:
A decentralised marketplace reintroduces the barter system, but in a far more simplified, secure, and practical form. Because everything in this universe can be described by one standardised digital currency in this marketplace, two parties will be able to swap objects of significance. These objects can be anything - electronic and electrical equipment, research papers, collectibles, games - pretty much anything that one person owns and another desires, much like money. There will be no further registration of goods, user authentication, or transaction fees necessary in this method. Users can easily join a DeFi community and conduct an anonymised yet encrypted peer-to-peer trade using a blockchain-powered smart contract.
Forecasting and Gambling:
Decentralized finance has no geographical boundaries, and anyone with a smart device and an internet connection can join the group. With DeFi, the prediction market, wagering, and gambling will take on a whole new meaning. Gambling is a field with various limits depending on country-specific rules, accessibility of betting on a certain sport in a nation, financial capability, and many other factors. DeFi eliminates all barriers, allowing anyone from anywhere in the world to bet on any sport at any time, needing no one's permission.
Conclusion
There are already a few dApps on the market, and they're causing quite a stir in the economic world as decentralized finance pledges to return power back to the masses. In the twenty-first century, when we have witnessed far too many corrupt practices and inappropriate unfairness by those in strength, DeFi creates a much-needed cost-effective, transparent financial system that is all-inclusive. This gives us hope for a better future with an economy without any border, incorporating equality to all humans on earth.