Decentralized Finance (DeFi) is the new way to conduct financial transactions, using technology to eliminate the need for traditional middlemen found in centralized finance. By using peer-to-peer networks and blockchain technology, DeFi allows individuals to trade assets from anywhere around the world.
DeFi is an umbrella term for a variety of services in crypto that aim to replicate functions of the Traditional Markets (TradFi). In the spirit of Web3, DeFi is open, permissionless, and composable. Any person can use it to lend, borrow, transfer, for savings, or build on top of it. DeFi is based on self-executing codes (smart contracts) and overcollateralization rather than approvals, credit score or other type of worthiness track record.
Why is DeFi needed?
Unbanked Population: It is estimated that 1.4 billion people (~20%) do not have access to banking services (check or savings account).
Barriers to Credit Market: Access to traditional credit markets normally require formal employment and long term banking relationships.
Inefficient Remittance Market: Annually, USD 650 bn are sent globally in remittances, with an average cost of 6% and several days to settle.
Digital Payments: Roughly 50% of adults do not send or receive digital transactions in a regular basis.
With this in mind, Decentralized finance brings financial tools closer to people that do not have access to them nowadays and also brings benefits to people that already utilize traditional financial tools.
What are the benefits of DeFi?
Transactions are recorded in a distributed and secured database, where they cannot be altered or tampered with.
You have more control over your money
Transactions are faster, cheaper, and more secure than traditional finance.
You can access DeFi platforms from anywhere in the world, and there are no geographic restrictions.
You can negotiate interest rates and lend money directly to other individuals, without the need for banks or other financial institutions.
Transparent, smart contracts and records of completed transactions available for anyone to review.
Decentralized, there is no risk of financial institutions going bankrupt or making decisions that are adverse to your interests.