The BuyT Desk
As of May 2021, the DeFi sector was pegged at $128 billion market capitalization. There are many Indian startups in the DeFi space. CoinDCX, WazirX, Nuo, Polygon, InstaDapp are few names. Many more are jumping on the Decentralized Finance bandwagon. Presently, in the nascent stage, DeFi is evolving and transforming constantly.
The concept of Decentralized Finance
DeFi challenges the global movement of money. How do you pay a restaurant bill? The bearer swipes your card, and a cascade of approvals begin. First, the restaurant owner’s bank receives a card service use request. Post that approval, Visa or Mastercard is approached. They relay the payment request to your bank. Finally, your bank approves, and the payment happens. Behind one financial transaction, there were three intermediaries. At each step and for every transaction, you pay a fee to every intermediary.
Finance is controlled, authorised, and regulated by Central banks of different countries. DeFi disrupts the functioning of the current financial system. Blockchain technology is the basis of DeFi. Two people perform a transaction on a Decentralized Finance platform without a middle person. There is no requirement for a central authority.
DeFi offers more. Around 190 million Indians without a bank account cannot enter the formal financial system. DeFi provides the unbanked global population platform for financial transactions. Anyone can transact without paperwork and a bar on the minimum transaction amount.
How does a transaction happen in DeFi space?
Two parties on a DeFi platform agree to the terms of a transaction. These terms are encrypted in a smart contract. Once published, a smart contract is immutable. The transaction fees for using a DeFi platform are minimal.
The security of a transaction is built-in the blockchain technology. Every transaction creates a new link in the chain. People, called miners, solve complex mathematical problems to verify a transaction. Also, every computer in a blockchain can view all the transactions. Only digital wallet codes are shown. Hence, transactions in DeFi are secure and transparent. There is no middle person between the parties. The transaction fees are lower.
Trends in DeFi
The intangible cryptocurrency was the mastermind behind the initiation of DeFi. However, the power of blockchain technology offers endless possibilities in DeFi. Trading of shares on DeFi platforms is a new trend.
Fluctuations in the value of cryptocurrencies have been drastic. There is no anchor to the value of a cryptocurrency. Under such circumstances, a layperson will never see digital money as a viable investment. As a result, DeFi saw the creation of stablecoins. A stablecoin is the same as a cryptocurrency. The difference is that its value is anchored to a fiat currency like USD. Stablecoin is a digital currency with built-in stability. Improvements and variations of digital money are occurring by the minutes.
