Let’s look at how banks function in our current financial setup. Banks make money by borrowing funds at a lower interest rate and lending at a higher interest rate. The difference between the two interest rates is the Net Interest Margin (NIM). Now, what if you can directly lend your money to a third party? […] The post 5 Reasons You Need To Get Started With DeFi appeared first on ZebPay | Buy Bitcoin & Crypto.
Let’s look at how banks function in our current financial setup. Banks make money by borrowing funds at a lower interest rate and lending at a higher interest rate. The difference between the two interest rates is the Net Interest Margin (NIM).
Now, what if you can directly lend your money to a third party? You can earn a higher interest on your money compared to what you were making when you were depositing the money with the bank, and the third party will also be able to borrow at a lower rate, which will be a win-win for both. Essentially, you eliminate the need for a middleman, i.e. the bank. This is the core concept behind Decentralised Finance (DeFi).
DeFi is an all-encompassing term used for global peer-to-peer financial services based on a public blockchain. DeFi has the potential of creating more inclusive, faster, cheaper and more efficient financial services for anyone with an internet connection.
So DeFi is NOT Bitcoin! It only uses the technology on which the Bitcoin crypto asset was built on the blockchain and has become the digital alternative for all our current financial systems.
Importance of DeFi
First, let’s get some context as to why you need to start looking into DeFi. In the little time of its existence, close to $80 billion has been locked in DeFi applications globally. This means that instead of depositing this money in equity, debt or gold markets or depositing it in banks or with traditional asset managers, people deposited it in DeFi platforms.
Because they believed that the risk-adjusted returns provided by DeFi platforms were more favourable than traditional banks or investment services.
Here are five reasons you should get started with DeFi:
DeFi is built on a decentralised blockchain. The transactions are all executed through smart contracts, which are codes that ensure execution once a predetermined condition is met. A single entity does not control its functioning. All the transactions, codes and data are open and visible to anyone for scrutiny. When you deposit your money with a bank, you have no say in the decision making of the bank. In DeFi, one can participate in the governance of an application by voting on proposals. This makes DeFi inherently auditable.
2. Control over assets
Currently, to avail the bank’s services or any other financial service, you will have to transfer your funds to the entity. The user can then direct these funds, but the central entity shall handle the funds. For instance, even crypto exchanges that allow you to buy and sell crypto assets are centralised entities. They hold your crypto in their siloed wallets. In contrast, DeFi empowers the users to use the funds to their discretion. To interact with a DeFi platform, users are given a serial number, and the users can then choose to use their funds at their discretion from their non-custodial wallets.
DeFi’s most significant advantage comes from its potential to make finance accessible to everyone in every corner of the world. So basically, a person sitting in India can easily take a loan in US Dollars without waiting for a bank to approve the loan. DeFi allows internet access to lend or borrow in any global currency and earn attractive yields on DeFi platforms. Cross Border Payments become cheaper, faster and more secure.
For instance, DeFi is being used to give funding to millions of refugees who are denied access to traditional financial institutions as they cannot prove their identity or have the required credit history. DeFi can bring down the gates created by centralised financial entities.
Furthermore, though it is early stages for DeFi, it provides an entire suite of financial services like lending, borrowing, derivatives, trade cryptocurrencies, insurance and earning yield. All this in a 24/7 market.
4. Reduce Human Element in Finance
Let’s think of it this way: Is it easier to bribe a human officer or a code fed into a computer. The transactions on a DeFi platform are executed by smart contracts, which is nothing but a code written on a public blockchain. Thus a majority of times, a code is expected to act more neutrally than a human officer. That’s the benefit that DeFi brings. It also reduces the losses caused by human incompetency or negligence.
5. Real-Time Data
If you have invested in equity markets through stocks or mutual funds, you would know that one has to wait for companies’ periodic disclosures to track how your investments are doing. In the case of investment in private companies, the disclosures are even more opaque and discretionary.
DeFi solves this problem! Since it is built on a public blockchain, all data is publicly available in real-time. This helps investors make more efficient capital allocation decisions, provide better price discovery and allocation of resources. At the same time, it’s easier to trace malicious accounts and activities.DeFi is not free from risk. Money Laundering can still occur, and a poorly programmed code can make a DeFi platform fraught with errors. Further, a lot needs to be done to make these applications user friendly. Regulatory support is also a must for the mass adoption of DeFi. But DeFi is here to stay, and its benefits are being acknowledged increasingly by organisations across the globe. To participate in the growth of various DeFi platforms, one can invest in their tokens through crypto exchanges. Start trading on Zebpay Now!