What is decentralised finance - Can it replace the banks?

Vimal Joshi
Updated: 14 Dec 2021, 03:26 PM IST
TL;DR.

Decentralised finance is the process of carrying out financial transactions via blockchain between different parties without intervention of any intermediaries such as banks

Decentralised Finance is an ecosystem of applications developed on blockchain technology with capabilities to execute transactions automatically.

Decentralised Finance is an ecosystem of applications developed on blockchain technology with capabilities to execute transactions automatically.

It is not the evolution of technology that leaves people dumbfounded, but it is, in fact, the pace at which the technology is growing which is awe-inspiring, unnerving and mind-boggling.

In banking and finance, almost everything has been digitised so much that the customers do not need to visit a bank branch any more for any of their banking needs. Despite this, not many of us can expect the banking to happen without a bank.

Well, this is exactly what is brewing in the form of technological revolution, known as ‘Decentralised finance, or DeFi’.

And it appears that life has come full circle since 1994 when Bill Gates predicted, and rightly so, that ‘banking is necessary, banks are not.’

What is decentralised finance?

DeFi is a financial ecosystem of applications developed on blockchain technology that has capabilities to execute transactions automatically. These transactions are carried out through smart contracts on the blockchain

It is a system that enables investors to access financial products on a public decentralised blockchain network, making the financial products accessible to everyone and not only to those approaching via banks or financial institutions.

Unlike banks and other intermediaries, decentralised finance or DeFi does not require government ID or address proof. In other words, this is the system that allows buyers, sellers, borrowers and lenders to transact with each other via software on blockchain instead of approaching through a company.

Relation to blockchain

DeFi is a blockchain based form of finance, but it is not the only thing that runs it. Contrary to a popular misconception, De Fi comprises a mix of open source technologies, software and of course, blockchain. There are several De Fi platforms in use such as stablecoin-based lending platform, MakerDAO. It is one of the first De Fi applications that got popular.

Irrespective of the technology deployed, DeFi aims to remove intermediaries between the transacting parties who enter into financial contracts. These contracts, known as smart contracts, are automated agreements between borrowers and lenders or buyers and sellers. There is no oversight of these smart contracts carried out via DeFi.

 

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Decentralised finance allows buyers and sellers to transact with each other via software on blockchain. 

According to CoinGecko, DeFi occupied only 5 percent of the crypto universe, although it is growing rapidly. In the mere three years ending June 2021, DeFi assets have grown from $4 billion to $93 billion in the crypto market.

Although the overall volume of smart contracts has risen rapidly, decentralised finance is still believed to be an unexplored industry where a full-fledged infrastructure is still being built.

First Published: 14 Dec 2021, 03:26 PM IST
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