What’s The Buzz About DeFi?

Cryptocurrency remains one of the top financial stories of all time. Every day, we get to hear something or the other about digital currencies. With blockchain technology forming the base behind cryptocurrency transactions, the importance it enjoys makes every possible sense. When talking about the cryptocurrency market, needless to say, blockchain is a term that's heavily used. On the same lines, one such term that has grabbed everyone's attention recently is that of DeFi.

What's The Buzz About DeFi?

To begin with, DeFi draws inspiration from blockchain.

DeFi stands for decentralized finance and is a term used for the financial applications built on blockchain technologies, typically using smart contracts. It consists of applications and peer-to-peer protocols developed on decentralized blockchain networks which do not require any access to lend, borrow or trade.

Now addressing the question that many want answers to – what brought DeFi into existence? Well, the main idea of coming up with this decentralized finance is to create a financial system that is not just open to everyone but at the same time minimizes the need to trust and rely on a central authority. The need to transform the traditional financial world using blockchain and the launch of smart contracts brought in the concept of decentralization of legacy financial systems. In addition to this, questions pertaining to the centralized authorities' ability to manage the money made it all the easier for DeFi to play its part. With DeFi, a transparent and robust financial system was no longer a distant dream.

Let's get practical here – the different sources of investments be it in the form of deposits, government bonds, etc result in a rate of return that many might not find good enough. If that is the case with you as well, then you might be in search of alternative investment options. On that note, the extent to which DeFi has grown over the years is definitely worth a mention. This comes as no big a surprise for the fact that DeFi provides the investors with a return that is way higher than what other options have in store to offer.

Though DeFi has enjoyed a lot of attention in the world of finance, one aspect that cannot be overlooked is that of the restrictions and regulations. Companies across the globe are still not clear with the legalities to be followed and the set of different standards to be met in order to make a transaction possible.

Yet another point that is worth taking note of is that decentralized finance is still in the initial phase and is just beginning to evolve. Many might find the total figure of DeFi to be impressive, however, the fact that most of the DeFi tokens lack sufficient liquidity and volume to trade in crypto markets cannot be overlooked.

DeFi is an incipient industry and its infrastructure is something that is still being worked upon. The regulation is minimal – or rather absent. Also, considering how open and relatively distributed this network is, problems pertaining to the existing financial regulation are bound to arise. Despite all of this, what most of the investors are optimistic about is that DeFi is set to take over and replace the rails of modern finance in the days that lie ahead.