In our new series, we will take ten topics and explain them to you in the time it takes for your morning toast to cook, 2 minutes, that's all we've got, so here goes…
DeFi in 2 Minutes Flat (feel free to time yourself)
According to the Zinnia docs…
"It's a revolution, out with the old, in with the new! Every conceivable aspect of the finance sector is being analyzed and assessed to discover new opportunities for decentralization. With 24/7 global markets, instant transfers, and users in control of their assets, decentralized finance is bringing the benefits of blockchain to those in the know."
So, here we go, a very brief look at DeFi and how it works…
DeFi uses blockchain-based protocols to create an ecosystem of financial products that rival traditional economic systems. Using blockchain, DeFi (DEcentralised FInance) enables transparent, permissionless, peer-to-peer transactions that are easily accessible to anyone with an internet connection and result in users having total control of their assets.
Who will regulate DeFi and how they will do it is yet to be established. With borderless transactions covering multiple traditional financial jurisdictions enforcing regulation is a complex problem and while regulation is missing, accidents, hacks, and scams are not.
Traditional financial providers rely on profit and neglect areas of low income, resulting in many people in developing countries not having access to banking services. DeFi, with no regional restrictions, no KYC requirements, and no centralized entities, opens up these unserviced markets to financial services.
Blockchain eliminates the need for a centralized point of control. It reduces single points of failure because data is secure and distributed across independent nodes worldwide, reducing the opportunity for security breaches, censorship, or service shutdown. And, without the need for a centralized entity to act as an intermediary and with smart contracts executing transactions and resolving disputes, financial products become permissionless, and users stay in control of their funds.
Because DeFi is built on public blockchains and has the assurance of cryptographic verification, it reduces the amount of trust required, resulting in instant transaction settlements, no credit checks, and the ability to collateralize digital assets, a significant advantage over traditional borrowing services.
DeFi shifts the onus of responsibility onto the user. Without an intermediary, the only person responsible for your assets is you, and the immutable nature of blockchain only heightens that responsibility. An extra level of awareness and education is a must, no easy feat in an industry full of confusing language and futuristic tech. And while most DeFi services are trustworthy, there are inevitably some bad actors, so do your due diligence and never risk more than you can afford to lose.
In its infancy, problems with stability, regulation, and energy requirements persist; however, once these issues have been answered, DeFi can change the financial world forever. With the availability of new markets and a more inclusive customer base combined with cheaper, faster, and more diverse products DeFi has the potential to create a balance in power between banking and the individual for the first time.
Well, let's leave it there for the time being. Like with anything in life, the more you look into it, the more complicated it gets.
Further down the line, we will explain DeFi in more depth and look at the specifics like lending, borrowing, stablecoins, and other DeFi services.
But, our time is up!
Next on the radar is Web3.