DeFi or Decentralized Finance is a financial technology or application in cryptocurrency or blockchain that eliminates the mediation between a financial entity and the transactors. It became popular in 2020. In a centralized finance, the movement of the money or the transaction is being paid. For example, when you purchase some goods online, you’ll notice that you are being charged for service fee, transaction fee, and processing fee and sometimes it’s just indicated as “other charges or other fees”. This is quite annoying and unpleasant to the eyes especially when you see that the amount you are supposed to pay without those fees is much lower.
Another example would be when you are sending money abroad.
We all know how luxurious it is to send money overseas. For example, when you are sending money to someone via PayPal, you would notice that there are charges applied unless it’s sent to friends and family. These charges are payments to the entities involved in the transaction. Each entity gets paid for its service.
In decentralized finance, these charges are eliminated. It uses connectivity, hardware, and software advancements. For as long as there is an internet connection, the transaction can go smoothly across all locations.
How was this even possible? Decentralized finance go some inspiration from Blockchain. Blockchain is the technology behind cryptocurrencies. In the process, it holds records or history of transactions which makes it uncontrolled by a single source. By using Defi, it allows accessibility, security, transparency, low fees, and autonomy. Its accessibility allows anyone to transact in any part of the world without any restrictions. It permits 2 parties to negotiate interest rates and low fees. By doing that, it is making the transaction secure. This is what they called P2P or Peer-to-Peer transactions. Anyone might be able to review the transaction but it does not reveal the identity of the transactor.
Decentralized finance is still gradually developing.
There are still many financial institutions that are still centralized finance. The only goal of decentralized finance is to give convenience to all parties involved in a transaction like banks and other financial companies by eliminating fees.
Despite having such positive feedback on how safe it is to invest in Defi, there are still claims that it is still very risky to invest in it. As it is still evolving, it is understandable why it is not yet acceptable to many.