DeFi : definition, challenges and future
DeFi stands for Decentralized Finance. This concept involves two dimensions: finance and its operating modes, but also blockchain. Let's take a closer look at what this concept consists of, what its objectives are and, above all, what its future is.
How does DeFi work?
The Defi works on the principle of decentralization. The fiat currencies that exist today are all attached to a central bank. Cryptocurrencies, on the other hand, are not controlled by any entity and their price is free. They work thanks to the blockchain and each transaction is transparent, visible to everyone at any time.
Most of the financial services defined as DeFi refer to the Ethereum blockchain which allows the use of smart contracts. The purpose of these contracts is to avoid the need for an intermediary (a third person or entity) to verify the accuracy of the transaction.
To quickly and simply summarize what the blockchain is, we can compare it to a chain of blocks that groups, synchronizes and time-stamps each transaction that takes place between the users of the blockchain. From then on, each block added during a transaction is verified by the users of the blockchain: there is therefore no supreme entity that controls or limits it. This is an important development as it takes us out of the traditional framework of state regulation.
Read more : Blockchain, Crypto, NFT and Metavers: understanding the basics
The uses of DeFi
The objective of DeFi is to create an alternative to the current financial system. With the many technological developments such as NFT and Web3, it is essential that a new financial system develops in parallel, especially to ensure the trading and storage of these new assets.
One of the challenges of DEFI is also, of course, to create financial value. Since it operates instantaneously and without intermediaries, everyone can freely carry out transactions. The results are two fold: it facilitates investment as well as the management of one's savings and avoids the costs of intermediaries. Since transactions are verified, accessible to all and unchangeable, security is also reinforced, always with lower costs.
Read more : Market or corporate finance ?
DeFi: the future of finance?
At present, only 2.5% of the population uses the DEFI. It is mostly used by individuals who are looking to invest, save and trade without going through intermediaries that would cost them money and time.
However, several questions can be asked about the future of the DeFi. Indeed, what will happen to the transfer fees for professionals? Is it fair that they are the same as for individuals? Is it really the best way to ensure the security of transactions ?
If DeFi really intends to replace traditional financial institutions, all these questions will have to be studied. In the meantime, we can expect to see the creation of a mix between current financial services and the technologies proposed by DeFi.
