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A Beginner’s Guide to What Is Decentralized Finance (DeFi) and Why we need It

Maticz is the best DeFi project development company in India provides decentralized finance applications for the financial sector. Here Maticz provides the complete beginner’s guide about what is decentralized finance ( DeFi ) and why we need it. 

What is Decentralized Finance (DeFi) ?

Decentralized finance is often called DeFi for short. Decentralized Finance (or simply DeFi) refers to an economic paradigm that is built on top of blockchain networks. The Decentralized Finance (DeFi) or Open Finance is a movement that takes the promise is to make the currency world widely accessible to everyone, no matter where they are in the world.

Especially, the DeFi aims to create an open-source, transparent, and permissionless financial service that is available to everyone and working without any central authority. The users can maintain full control of their assets and interact with this ecosystem through peer-to-peer (P2P), decentralized applications (dapps).

In this article, Maticz provides information about DeFi, its potential applications, benefits, advantages, use cases, promises, limitations, and more

What Are the Benefits of Decentralized Finance? Why we Need It?

1. The main benefit of Decentralized Finance is easy to access to financial services, especially for those who are isolated from the current financial system. 

2. Another potential benefit of DeFi is the modular framework it is built upon – easy to operate DeFi app on public blockchains. It will potentially create entirely new financial markets, products, and services. 

3. Traditional finance relying on such institutions like banks to act as intermediaries, and courts to provide intervention. 

4. DeFi applications do not require any intermediaries or central authority. The code specifies the resolution of every possible debate, and the users can maintain the control of their funds at all times. This reduces the costs of using these products and allows for a more no-friction financial system.

5. Decentralized finance application is deployed on top of blockchains, so even the single point mistakes will not happen. The data is recorded on the blockchain and the copy of data is being across thousands of nodes, making the potential shutdown of service is a complicated undertaking. 

3 Key principles of Decentralized Finance

Decentralized finance leverages some key principles of the Ethereum blockchain, to increase the financial security, unlock liquidity, growth opportunity, transparency, and standardized economic system,

Programmability

Highly programmable smart contracts enable automated execution and the creation of new financial instruments and crypto-assets.

Immutability

hack-proof data coordination and decentralized architecture of blockchain increase the security and audibility.

Interoperability

Composable software stack of ethereum ensures that Decentralized Finance protocols and applications are built to integrate and complement one another.

What Are the Use Cases for Decentralized Finance (DeFi)?

KYT and Compliance:

The process of Know Your Transaction(KYT) similar to the process of KYC ( Know Your Customer), blockchain-based decentralized finance applications now enable the financial businesses to easily analyze, monitor, and verify transaction details to prevent fraudulently and meet regulatory requirements.    

DeFi Data and Analytics: 

Track the value locked in DeFi protocols, exchange volumes, borrow and supply APRs, and more with our comprehensive and customizable data platform.

Token Utilization. 

Programmable “proof of use” standards for token networks align promotions during network launches and minimize passive speculation, ensuring that tokens end up in the actual user's hands.

Role of Smart contracts in DeFi?

Most of the potential and existing applications of DeFi involve the creation and execution of smart contracts. The Usual agreements are used legal terms to specify the terms of the relationship between the entities who entering the contract, but the smart contract uses computer code.

Since the rules, terms, and conditions are written in computer code, smart contracts have the unique ability also to enforce those terms through computer code. So the smart contracts enable the reliable execution and automation of a large number of business processes that currently require manual administration.

Using smart contracts is faster, easier, and reduces the risk for both two parties. 

On the other side, smart contracts also have some risks that if the computer code may have possibilities of bugs and vulnerabilities, then the data and confidential information are locked in smart contracts.

What challenges does DeFi face?

Poor performance: Blockchain is slower than their centralized counterparts, and this translates to the applications built on top of the blockchain. The developers who develop DeFi applications need to take these limitations into account and optimize their products accordingly.

High risk of user error: DeFi applications transfer the responsibility from the central party to the user. This can be a negative aspect for many. While the decentralized finance applications are deployed on top of an immutable blockchain that minimizes the risk of user error is a particularly difficult challenge 

Bad user experience: Currently, using DeFi applications needs additional effort on the user’s side. To be a core element of the global financial system, Decentralized Finance(DeFi) must provide a tangible advantage that incentivizes users to switch over from the traditional system.

Cluttered economic: It can be a difficult task to find the application which is most suitable for a specific use case, and users must have the ability to find better choices. The challenge is not only building the applications but also thinking about how they fit into the broader decentralized finance ecosystem.

Final thoughts

Decentralized Finance(DeFi) is focused on building financial services and separate it from the traditional financial and political system. This would allow for a more open financial system and could prevent precedents of censorship and discrimination all over the world.

While a tempting idea, not everything beneficial from decentralization. Finding the use cases which is most suitable for the blockchain’s characteristics is crucial in building a useful stack of open financial products.

If successful, DeFi will take power from large centralized financial organizations and put it in the hands of the users and open-source community. 

 

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