Decentralised Finance aka DeFi, is an umbrella term for smart contracts, decentralised applications (dapps), and protocols built on the Ethereum blockchain. And right now, it’s one of the most promising use cases of Ethereum and has the potential to completely change how we view finance.
DeFi empowers individuals to create new opportunities like never before by taking advantage of characteristics that we’re going to be seeing in this article. And in doing so, also understand why it’s such a big source of excitement for so many people out there.
1. Open Source
DeFi applications are open source. This is very important for any dapp as it enables other developers to audit the smart contract’s code that’s behind the dapp and validate its functionality, capabilities, and most importantly, security. Open-source codes tend to be far more secure and trustworthy than private codes because of the community engagement they often get.
DeFi brings a new meaning to the word ‘transparency’ when it comes to finance. Since most dapps function on public blockchains such as Ethereum, each and every transaction is publicly available. In fact, all the activities happening on the blockchain are public. The difference between this approach and a traditional bank account is that the accounts are not tied to anyone directly. Instead, to preserve user’s privacy, accounts are pseudonymous and only list a numerical address.
However, this also does not mean that your accounts can’t be traced back to you at all. While your accounts are not directly linked to your name, in particular, there are still ways for researchers to figure out who owns them if required.
Bonus tip: resources such as block explorers can help people trace and track decentralised transactions of non-privacy focused crypto-coins.
3. More Control Over Your Finances
You are the master of your finances. No one can suddenly ban you from one of the dapps, or freeze your account, or take your money, etc. (Note- this logic holds true only for decentralized applications and not centralized applications (CeFi) built on Ethereum). The code is law and code does not discriminate. Everyone is seen as equal by the code regardless of their gender, skin colour, ethnicity, etc. You might not think that’s a big deal if you’re reading this sitting in a developed country. But you should. Because, Cyprus, a wealthy country in the European Union, thought that too. But still, its citizens had anywhere from 6.75% to 10% of their bank deposits seized to bail out the banks. Thankfully, this cannot happen in the DeFi space.
4. Borderless Finance
Decentralised apps are designed to be global from day one. This means that you have access to the same DeFi apps, services, and networks, regardless of where you’re located. Of course, local government regulations may still apply. But, technically speaking, most DeFi services and apps are available to anyone who has a smartphone with an internet connection.
The global nature of dapps represents how the developers envision financial platforms today, and in the future. And as a direct result of this, people who have remained disconnected with the current financial system can now have access to various financial services, thanks to DeFi.
Unlike traditional finance, decentralised finance operates without any gatekeepers. Meaning, anyone can develop a dapp and present it to the world. Also, anyone can participate in DeFi without having to concern themselves with seeking someone’s approval first. This is exactly opposite to the traditional financial system that requires users to traverse through a myriad of regulatory verification processes before letting them participate in the global economy.
A very important pillar of the DeFi space is interoperability. Interoperability is the ability of two or more systems/components to exchange and then use information between them. This property is critical because it ensures that as more & more developers enter the space, they can build upon the work that’s already existing in the community. For example, it’s very common for a single user to utilize wallets, decentralized exchanges, and stablecoins together. This is only possible because of the seamless integration between DeFi applications.
Due to the open nature of the DeFi space, both developers and users get a lot of options and functionality when it comes to developing or using dapps. Since the majority of dapps are interoperable, open-source, and transparent, developers and users gain a significant number of choices through the integration of third-party apps and have access to a very long list of dapps to choose from to meet their exact financial needs.
8. Access To Other Forms Of Capital
In the decentralized finance world, one doesn’t have to accept the forms of capital that centralised authorities like governments push down your throat. For example, Argentina’s Peso has been in increasingly treacherous waters and has struggled for decades with runaway inflation and depreciation. So as a precaution, in 2019, the Argentinian government imposed capital controls on its citizens in order to protect the Argentine Peso from further devaluation. This move limited the Argentinian citizens to buy only $200 per month (down from $10,000). But with DeFi, Argentinians have an alternative. For example, they can store their wealth in stablecoins like DAI or USDC instead of having to rely on the actual USD.
9. Ability To Create Your Own DeFi Apps
Got an idea that has the potential to be the next big dapp present on every DeFi user’s smartphone? Well, what are you waiting for? In the DeFi space, you have the opportunity to become a part of the wave that’s moving to bring the next generation of finance. There’s nothing stopping you from creating and launching your very own DeFi app. Just keep one thing in mind before you embark on this journey, you might need some help to actually make the app as it’s kind of a complicated process. And afterwards, someone who can perform a security audit of the app’s smart contracts so you can proudly present your dapp to the public with full confidence in its security.
True freedom does not come without financial liberty. Decentralised Finance gives economic power and freedom to the people by creating a financial system that is accessible, transparent, and efficient. It’s the next big thing in the blockchain space that is just starting out. And you can fully expect to see much more of it in the news in the coming future.