Decentralized finance, or DeFi, brings financial products and services to the global population without relying on intermediaries. Instead, the industry leverages secure distributed ledger technology to remove banks and other institutions from the equation.
Centralized Finance Has Its Issues
Banks, governments, and other institutions control the current finance ecosystem. Banks hold money on consumers' behalf and try to profit from doing so. In addition, numerous third parties facilitate money transfers between parties, investments, liquidity, etc. Every third party makes money from handling funds that aren't theirs, creating a strong incentive to keep users engaged in this ecosystem.
For consumers, the involvement of third parties is less outspoken. One pays through their bank-issued credit or debit card in the store and takes the goods home. Under the hood, there is a growing network of third parties facilitating this money movement, involving merchants, acquiring banks, payment card networks, the consumer's bank, etc. While these payments are convenient for the consumer, merchants and store owners need to pay for the "privilege" of processing your card.
That approach goes beyond payments, too, as every financial transaction costs money. The charges might not necessarily be visible to the one making the payment, but those on the receiving end rarely receive the full amount being sent. In addition, traditional finance has tremendous amounts of paperwork, causing lengthy and unnecessary delays. Banks can also prevent you from withdrawing money or making card payments in foreign countries, limiting one's financial freedom.
Can Decentralized Finance Do Better?
The purpose of decentralized finance is to eliminate all intermediaries and paperwork from the equation. Instead, users, merchants, and businesses conduct peer-to-peer transactions over blockchain technology. That approach should, in theory, allow for better security protocols, connectivity, software, and more advanced hardware. It should also empower the consumer and the business, as they interact directly and without requiring permission.
Participating in decentralized finance is possible as long as there is internet access. With a connection, anyone can lend, trade, and borrow through software recording assets in DeFi environments. The blockchain aggregates data from all users and records every transaction through a native consensus mechanism.
In essence, decentralized finance providers financial services and products to everyone, regardless of location, religion, age, ethnicity, etc. Furthermore, users gain more control over their money thanks to personal wallets and trading services. However, there is no anonymity or privacy by default, as blockchains are public ledgers anyone can access.
Exploring The DeFi Landscape
Various financial products and services exist in decentralized finance today. Thanks to the peer-to-peer nature, anyone can become part of this growing ecosystem and play a key role in the proceedings. For example, one can access loans within seconds, or one could provide crypto assets as liquidity to help protocols issue more loans while one earns a commission for doing so.
Users can access everything through the hundreds of decentralized applications in DeFi. Enter the loan or borrowing requirements in the dApp, and the protocol's algorithm matches you with peers meeting those criteria. There is no paperwork, no approval, and everything is publicly recorded on the blockchain. Keep in mind all activity will require cryptocurrencies, with different protocols supporting different assets and tokens.
Despite strong initial momentum, decentralized finance is still in the infancy stage. There is no regulatory framework or oversight, giving carte blanche to developers and companies. That is good for innovation, but DeFi has also seen a fair share of scams, theft, hacks, security mishaps, etc. Consumer protection in DeFi is a hot topic of debate, but it may take a while until regulatory measures are introduced.
What Is Total Value Locked?
One of the key metrics in decentralized finance is TVL, or Total Value Locked. It depicts the sum of all cryptocurrencies, tokens, and other assets held in the smart contracts of decentralized finance applications and protocols. That number includes all assets staked, loaned, deposited, or used for other financial activities.
It is very common to see the DeFi TVL go up and down over time. This is because most of the Total Value Locked comes from volatile crypto assets. Any market dip will bring down the DeFi TVL accordingly, even if users do not withdraw funds from the protocol(s).
Unlocking The Future of DeFi
There are still many opportunities ahead for the decentralized finance industry. Addressing the security concerns and scalability restrictions of existing networks will prove crucial. Moreover, the introduction of regulation can give it a broader mainstream appeal. Consumers need to feel protected and decentralized finance provides no safety nets whatsoever.
The future of decentralized finance will undoubtedly prove intriguing. Achieving financial inclusion and stability will be tricky, but nothing is impossible with the help of blockchain technology and cryptocurrencies.
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