What is DEFI? Bank killer
2024-10-09 07:29:00
Have you heard about decentralized financial management and its ability to render traditional banks obsolete? What if it's already taking place?
What is DEFI (Bank killer) ?
As the blockchain industry advances, there is an increasing focus on creating decentralized stablecoins that maintain a fixed value, such as Tether. A stablecoin is a digital currency that is backed by a stable asset or commodity, such as the US dollar.
For example, a dollar-pegged stablecoin, such as Tether, is backed by the dollar and constantly maintains the value of one dollar.Think about it, instead of keeping a large amount of dollars in a bank account that can be monitored, keep it in an encrypted wallet with security far beyond the bank without anyone noticing. Don't you still believe that Defi is a bank killer?
The goal of DeFi is to eliminate banks, intermediaries, and centralized organizations from the financial landscape.
In this article, we provide essential insights into decentralized financial management and how you can take advantage of its benefits.
DiFi, short for Decentralized Finance, encompasses a range of decentralized applications (DApps) built on blockchain technology. These applications aim to deliver financial services similar to those offered by traditional banks, but in a decentralized way, eliminating the need for institutions or intermediaries in digital currency transactions—hence the term "Bank Killer." Some of the key services provided by DeFi include decentralized lending and borrowing, staking, and yield farming.
For many years, banks and centralized institutions have held a strong grip on the financial landscape, compelling us to place our trust in them without question. Nowadays, if you need a loan, wish to buy or sell something, or need to pay your bills and taxes, you must rely on banks, government entities, or other centralized organizations. This often involves sharing personal details such as your age, education, and account balance, along with other sensitive information. Many individuals may not be comfortable with the idea of their data being stored and managed by these entities.
History has shown that centralized intermediaries can commit corruption or unintentional error. The field of decentralized finance has come to kill corruption, inadvertent error and the need for centralized trust by using blockchain and the concept of decentralization.
We can also define DeFi as: the movement to create an open source, permissionless and transparent financial services ecosystem that is accessible to all and operates without a central intermediary. In this way, the user has full control over his property and communicates with the ecosystem through decentralized applications.
DeFi, with its great purpose, can be considered one of the amazing innovations of the digital age under the block chain.
What exactly are the uses of this serial killer who has become the biggest threat to banking?
The applications of DeFi are very wide and most parts of the financial world can benefit from the benefits of DeFi. However, the three main uses of DeFi include:
1-Receiving loans and lending
2-Paid banking services
3-Decentralized exchanges
Receiving loans and lending
Decentralized lending protocols are one of the most popular applications in the DeFi ecosystem. Lending and receiving loans in a free and decentralized manner has many advantages over the traditional credit system. Among the interesting features of blockchain-based lending platforms are instant payment, the possibility of collateral with digital assets, and no need for credit checks,For instance, to access the liquidity you require, you can quickly obtain a loan by using your cryptocurrencies as collateral in DeFi lending protocols. While your pledged assets remain secure and can potentially increase in value, there is a risk: if the market value of your collateral drops below the amount of your loan, you could lose it. However, there are various strategies to mitigate this risk, which we will explore later. Given this, wouldn’t you agree that it’s fair to refer to it as a bank killer?
Since these services are provided on public blockchains, the need for trust is almost zero and a very high level of transparency is created. Basically, decentralized lending systems reduce the risk of users and make it cheaper, faster and more accessible to more people.
Paid banking services
Since DeFi applications are inherently financial in nature, compensated banking emerges as a clear application for these platforms. Such services may encompass the issuance of stablecoins, mortgages, and insurance policies.
As the blockchain industry advances, there is an increasing focus on creating decentralized stablecoins that maintain a fixed value, such as Tether. A stablecoin is a digital currency that is backed by a stable asset or commodity, such as the US dollar. For example, a dollar-pegged stablecoin, such as Tether, is backed by the dollar and constantly maintains the value of one dollar.Think about it, instead of keeping a large amount of dollars in a bank account that can be monitored, keep it in an encrypted wallet with security far beyond the bank without anyone noticing. Don't you still believe that Defi is a bank killer?
In the traditional credit services system, the involvement of numerous intermediaries makes the mortgage and collateral registration process both expensive and lengthy. However, the use of smart contracts can significantly lower legal and underwriting expenses.
Additionally, issuing insurance on the blockchain removes the necessity for intermediaries, thereby greatly minimizing the risk of policy violations. This approach allows for a reduction in the insurance policy amount while still maintaining high service quality.Well, when it is possible to reduce costs by increasing the quality of services, the market demand from banks will automatically lean towards Defi protocols, and this confirms that Defi is the killer of banking.
Decentralized exchanges
According to experts, decentralized exchanges will play an undeniable role in the future of financial transactions, and these exchanges themselves include DeFi.
In decentralized exchanges that work on the blockchain, traders can buy and sell digital assets directly without intermediaries. These transactions are done from users' personal wallets.
Also, blockchain technology can be used to issue and provide ownership of a large number of financial instruments. By creating a decentralized platform, these programs eliminate the need to trust trusted organizations, and with the help of distributed ledger technology, they do not have a single point of failure that can be attacked.
Where are DeFi programs executed?
At the heart of decentralized finance lies the smart contract, which enables the functionality of decentralized applications. Consequently, blockchains that support smart contracts are also capable of hosting DeFi applications.
A smart contract will have an enforceable guarantee after implementation. The developer determines the terms of the contract execution in the code, and after registering it on the blockchain, even he himself cannot stop the execution of the contract.
Ethereum is presently the leading platform for DeFi projects. It is fair to state that, at this stage, the Ethereum blockchain supports over 70% of the entire DeFi ecosystem.
summary
In this article, we got to know the concept of DeFi and why it can be called the killer of banking and its applications. DeFi is a broad field that tries to provide financial services needed by people by eliminating intermediaries. With the help of this field, we can move towards a freer financial system; A system that is available worldwide and prevents corruption, censorship and discrimination.
Decentralized DeFi applications run on blockchains that host smart contracts. Ethereum is currently the most important and widely used DeFi host.
DiFi is creating a future where we manage our finances without the need for banks and intermediary companies and have full control over our own assets.
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