Decentralised Finance (DeFi)
- August 17, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Decentralised Finance (DeFi)
Subject: Economy
Section: Monetary Policy
Context :With the massive rise in cryptocurrency investments, individuals and institutions are now beginning to explore decentralized finance (DeFi).
Concept :
- Decentralized finance, or DeFi, loosely describes an alternative finance ecosystem where consumers transfer, trade, borrow and lend cryptocurrency, theoretically independently of traditional financial institutions and the regulatory structures
- It’s a computer-controlled market that automatically executes transactions, like issuing loans backed by crypto or paying interest on holdings.
- DeFi platforms are structured to become independent from their developers and backers over time and to ultimately be governed by a community of users whose power comes from holding the protocol’s tokens.
- The DeFi movement aims to “disintermediate” finance, using computer code to eliminate the need for trust and middlemen from transactions.
- DeFi uses smart contract technology on the blockchain network with zero human intervention. This reduces the chances of errors and increases efficiency.
- DeFi removes middlemen and enables more efficient financial services at low costs.
- DeFi is on a blockchain network and generally open source, anyone with an internet connection can view, audit the source code and see all the transactions.
- Blockchain data is immutable in nature, which means once the information is on the blockchain network, it cannot be changed.
- How does DeFi work?
- A DeFi protocol uses computer code called smart contracts that run on the blockchain network.
- The source code of most of the DeFi projects are available for anyone in the world to check and audit.
- Users of the DeFi protocol can communicate with these smart contracts using their wallets to transfer funds, borrow, lend or avail any service that the DeFi provides.
- Decentralized Exchanges (DEXs) users can interact directly with the blockchain protocol to execute trades or avail services.
- The non-custodial framework of a DEX means that users can retain their cryptocurrency ownership and have complete control over their assets in their wallets.