What is DeFi?

Decentralized finance (DeFi), simply put, is a leaderless financial system within the digital banking sector. It is inspired by blockchain technology that is the backbone of digital currencies. It is controlled by a single, central source, without human ‘gatekeepers’—who are seen to limit speed and sophistication of transactions. The future of money means no more middlemen!

When you grab a coffee and use your credit card to pay, there’s a financial institution sitting between you and the coffee shop you purchased your latte from controlling the transaction. How? By having the power to stop, pause and record it. DeFi cuts those institutions out of the equation.

The 6 categories of decentralized finance

These 6 major groups of DeFi mainly incorporate cryptocurrency-based structures and maintain efficient pricing. Importantly, they also make decisions with full transparency, according to the current policies in place.

  1. Stablecoins - a digital currency that is linked to a national currency or a precious metal such as gold.
  1. Exchanges - a cryptocurrency exchange which operates in a decentralized way, without a central authority.
  1. Credit – a product allowing you to borrow, save, invest and trade based on open-source technology.
  1. Derivatives - a contract between parties of whose value is based on an agreed underlying financial asset.
  1. Insurance - similar to traditional insurance --DeFi insurance protects users from losses in return for a specific premium.
  1. Asset management – this is a simpler way for investors to take a position in a DeFi project without opening a crypto account.

Digital transformation in banking: the DeFi boom

The digital banking sector experienced an almighty boom in 2020.

According to research carried out by ‘DeFi Pulse’, the value of digital assets in DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021*.

There has been a whopping 610% increase in users of decentralized lending apps and its locked value since 2018 is over $12 billion!

Defi is not immune to threats

Despite its magnitude, it’s still early days for DeFi. This means, as with any new, rapidly growing technology, its benefits as well as potential dangers must be kept in check. Hype around cryptocurrency and DeFi is rife, causing some investors to make irrational and unsafe decisions with money.

With distorted investor expectations come risks, and regulation policies and considerations.

Viable threats to consider include:

  • Fraud
  • Cyberattacks
  • Governance controversy
  • Economic, technical and operational public policy issues

Before diving into DeFi, the risks must be calculated and the phenomenon of the ever-evolving digital transformation and cryptocurrency sector must be fully understood.

Glossary Source

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