Decentralized finance (DeFi): The future of finance
Traditional finance has been built on a certain model for many centuries. The main players in the traditional financial system were always banks. They attracted depositors’ money and guaranteed safe-keeping services. Banks issued these funds in the form of loans at a higher interest rate to persons who needed additional funding.
New technologies in this field are currently transforming the financial services industry and displacing traditional financial models. The new FinTech has led to the emergence of competing payment systems like Apple Pay or Google Pay. However, the new financial industry has emerged and is developing in recent times. That’s a technology of decentralized finance and systems like Bitcoin or the Linea Bridge. In this article, you will learn the main features of this technology.
Decentralized finance technology: the essentials
Decentralized finance is an open financial system based on blockchain technology. It does not have centralized financial intermediaries and is built on transparency of financial transactions, high transaction speed, and low transaction costs. As a result, the new financial infrastructure can be built in the coming years.
There are several categories of services in the field of decentralized finance, such as:
- stablecoins, crypto exchanges;
- credit, derivatives, and cryptocurrency insurance;
- asset management;
- support services like crypto wallets.
Each of these services has a base in the form of decentralized infrastructure, which is based on blockchain and smart contract technologies. Both are publicly available and do not require permission from government authorities. Also, their software is open source.
Basic principles of the DeFi
Decentralized finance provides access to financial services for every user who has an internet connection. They do not need to undergo complex procedures of identity verification as it is in traditional financial institutions.
All transactions and non-financial transactions remain described in the public blockchain. This guarantees users a high level of transparency and helps them to verify confidential information at any time of the day or night.
It is important to remember that records in a blockchain cannot be modified or deleted and various DeFi protocols can interact and create complex financial products and services. Each of these factors will consistently increase the security of this system and the trust of users.
Risks of decentralized finance
Modern organizations and services in the field of decentralized finance have so far little state and legal regulation. Today, some countries have begun to impose regulatory requirements on certain segments of the decentralized finance market. In particular, that is the requirement for licensing of crypto exchanges.
Also, there are many incidents in which decentralized finance and smart contracts services have suffered from theft due to technical errors or malicious acts of intruders. There is no single system in the world that is not perfect, which shows that the market of decentralized finance has all the possibilities for reliable growth.
Conclusion
Decentralized finance has already taken its place in modern financial architecture. Its operations are much more advanced than classical financial institutions. Digitizing financial activity guarantees high speed of financial transactions and reduces transaction costs but also can involve risks of hacking attacks. These circumstances are forcing states to introduce new laws regulating decentralized finance.