The acronym DeFi stands for Decentralized Finance and what does this really mean? Looking at the evolution of currency from trade by barter to digital currency, currency has always been controlled by a centralized body otherwise known as Central Bank. Decentralized finance, in a nutshell, has to do with all the financial application that is running on top of the blockchain. It is a system of controlling our assets through an open-source and through an ecosystem that allows everybody to have access to financial transparency without waiting for any central authority to take decisions. With decentralized finance, everyone is giving the chance to interact with the system throughout P2P and Dapps.
The emergence of decentralized finance platforms can be traced back to 2018 with the creation of MakerDOA stablecoin DAI, a cryptocurrency that has all the attributes of fiat currencies. Since one of the downsides of cryptocurrency has to do with volatility which implies that it is liable to upward and downward changes, this has been one of the reasons a large number of people are still having the fear to adopt it. Stablecoin is cryptocurrency that protects users from the changes that come with cryptocurrency like Btc and Eth as it can be held against other assets like Dollar.
Unlike traditional finance which can also be referred to as centralized finance, decentralized finance does not need any third party or intermediaries before users can have control over their assets or interact with the system. Centralized finance has to do with area coverage meaning it only consider the area where there is high-income to maximize profits, decentralized finance gives every individual either with high-income or low-income the privilege to enjoy all the opportunities that come through the financial services.
The use of DeFi comes with lots of potential use case raging from banking services to marketplaces
Banking Services: Decentralized finance makes use of Decentralized Applications (DApps) which also allow monetary banking with the use of stablecoin. With the adoption of cryptocurrency, users can now store their assets in digital form, and in other to avoid the shortcomings of volatility, stablecoin are forms of crypto that can function like real-life currency like Dollar, Naira, Pounds and many more. Decentralized stablecoin can be used to carry out every day to day activities without any central authority taking control.
Marketplaces: Another use case that comes with DeFi is Decentralized Exchanges( DExes), this allow a direct exchange of digital asset from wallet without moving it to centralized exchange through the assistance of smart contract. Smart contract stands as an automated lawyer that helps to monitor every transaction and reduce the risk of scam from both the seller and the buyer. Decentralized exchanges also have low trading fees compared to centralized exchanges because it comes with low maintenance work.
There are lots of challenges facing decentralized finance and some of it will be discus below
Government Policy: One major problem that is facing the adoption of digital currency has to do with government policy, some country government banned the use of cryptocurrency in their country and have a strict law against anybody that break this law. India for example is threatening to send anybody found using crypto to 10 years in prison. This is one of the challenges DeFi is battling with.
Economy Disarray: There is fear that if people switch their assets to digital assets, the economy of such country may face a major set back because central authorities will not have the power to control individual assets which in turn can undermine the local currency of any country. This is another challenge that is hindering the wide adoption of decentralized finance.
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