The Next Disruption in the Financial Market: DeFi
DeFi is the protocol that aims to remove all intermediaries from the financial chain, including banks.
While Bitcoin was created to decentralize money, DeFi was created to decentralize financial services — and an interesting fact is that all of this happens on the same platform: the blockchain.
Through DeFi, the goal — and what is already happening — is that loans, mortgages, and even investments can take place peer-to-peer, within the blockchain.
You might be wondering: if there is no company, no bank behind all of this, how do these transactions actually happen?
DeFi is built around communities. It is through voting power that people decide what the interest rate will be, which blockchain is used, and other characteristics that vary from protocol to protocol.
To have this voting power, users must purchase specific tokens called governance tokens. Although DeFi already operates in the world of cryptocurrencies, users can choose whether they want to use them — the most common being Ethereum — or whether they prefer to use a stablecoin, which is, as the name suggests, a currency with a more stable value because it is pegged to a physical currency, such as the US dollar.
And which blockchain is most widely used? For now, it is Ethereum. This is because the Ethereum platform supports the registration of smart contracts — that is, the recording of information within the blockchain.
This is not a fixed rule, however, and the blockchain used varies according to the community's voting power. Now for the question that is probably on everyone's mind: Is it safe?
It is no secret that scams are common in the cryptocurrency sector, largely because many users are still unfamiliar with how it works, are just entering the space, and there are many people who take advantage of that.
This is no different in the DeFi universe — users also need to keep their eyes wide open to avoid falling into traps.
In the case of DeFi, this can be even more complicated, because in a standard cryptocurrency transaction — a Bitcoin sale, for example — there is typically an exchange operating behind that transaction.
In the case of DeFi, by its very nature, there are no intermediaries beyond the community that only decides certain parameters. So if something goes wrong, there is no customer service hotline users can call to file a complaint or request a refund.
The advice, therefore, is: research thoroughly before entering this space. You might be wondering: Is DeFi similar to open banking? Yes and no. Let me explain. They are similar in the sense that both aim to decentralize financial services, but it is worth noting that in open banking, transactions still involve intermediaries such as banks and fintechs, whereas in DeFi the objective is to eliminate any intermediary altogether.
Source: Startse