The world of finance is changing all the time, particularly since the launch of cryptocurrency 15 years ago. Since then, investment opportunities have completely changed, as savers have had the option of buying virtual currency and seeing if the value increased before selling.
This gave them an alternative to traditional investments like gold, property, bonds, and equity shares.
Cryptocurrency has certainly captured the interest of investors, and there are currently 560 million cryptocurrencies users around the world. As many as 72 million people in the US alone use crypto, followed by 55 million people in South America, and 49 million in Europe.
The latest change in the financial world follows from this adoption of virtual currencies, allowing people to move cash without the need of a third party.
To find out more about decentralised finance, or DeFi, read on:
What is DeFi?
DeFi involves using blockchain technology so that financial transactions with cryptocurrency can go ahead without the need of external agents.
To put it simply, it allows crypto users to lend, earn interest, borrow and trade by dealing directly with one another.
This peer-to-peer financial management makes finance more accessible to people, as there is no need for traditional institutions, such as banks, to get involved.
For instance, some investors might not be accepted by a bank, but as long as you and the other party agree to specific conditions first, you are bound to fulfil them, cutting out the need for a financial authority to get involved.
By letting users buy and sell assets without the middleman, this makes certain products, such as loans, insurance and investments, available to more people.
How does DeFi work?
This financial system is based on secure distributed ledgers, and the transaction is secured by smart contracts.
These self-executing agreements are made on blockchain and cannot be altered in any way. For instance, an investor puts in the conditions that need to be done for the contract to be fulfilled using simple “If this… then this…” language.
Once the conditions have been met, the other part of the contract runs automatically. An example of this would be, if there is x amount of money available, it will be sent to another account specified in the smart contract.
These smart contracts mean financial institutions do not have to act as guarantors or mediators, as everything is very black and white. Subsequently, there is no room for disputes or disagreements.
DeFi is mainly built on Ethereum, although it is possible to use other blockchains. This platform allows people to get involved with crypto transactions securely.
Funds are accessed using a digital wallet and, as blockchain retains the transaction history indefinitely, investors can be confident their smart contracts will be secure and transparent, so the other party has to fulfil their obligations as set out in the agreement.
How is DeFi affecting traditional finance?
DeFi is gaining popularity all the time, as investors are realising there are many benefits to this form of financial management.
Centralised finance, on the other hand, relies on the authority of regulators before transactions can go ahead. It involves payments, loans, and trades having to pass through middlemen first, which can be time consuming and inefficient.
As DeFi lets you do what most monetary institutions do, lots of people do not see any advantage of sticking with more traditional routes of financial transactions, as you often have to deal with bureaucracy and red tape with centralised finance first.
What’s more, new products are coming on to the market every day, opening up DeFi to more and more people who might want to use it for different things.
Therefore, it has the ability to give people greater authority over their finances and allows them to potentially earn a lot more without the restrictions centralised financial institutions might pose on them.
For instance, not everyone is able to open a bank account, while credit checks may inhibit opportunities for those who have turned their finances around.
How can XRPayNet users benefit from DeFi?
As more people get to grips with cryptocurrencies, and realise the possibility of using the virtual tender in real life, DeFi is set to become increasingly popular.
XRPayNet, for instance, allows crypto to be spent at retailers, to be exchanged into real currencies anywhere in the world, and to purchase things on a crypto card.
Therefore, the next natural step for these users is to be able to trade, get insurance, send, borrow or lend their cryptocurrency as well through a decentralised finance system.
There are many benefits of this for crypto customers, including:
Speed and efficiency
DeFi certainly speeds up transactions, as there is no need to get approval from financial institutions. By cutting out other parties, spenders can save themselves a lot of time and the contract can be fulfilled much more quickly.
This makes it far more efficient, enabling things to move faster and more succinctly, without messages getting lost in the system. As there are only two parties involved in the transaction, there is less room for error or delay, which is definitely appealing to lots of people.
Reducing costs
DeFi also helps to reduce costs for crypto users, as they do not have to pay for intermediaries to get involved. Having to go through ‘red tape’ can end up being extremely expensive, as they can add on a lot of fees to the customer.
However, by dealing with the provider directly, they can avoid paying steep charges.
Flexibility
Another thing that many people like about DeFi is that it is much more flexible than traditional institutions. For instance, anyone around the world can get involved in financial transactions, as long as they have access to the internet.
It also means they can take action at any time and any day of the week, as they are not limited by trading hours, like they would be with a bank. This increases accessibility and enables millions more people to have true autonomy over their money.
Security
Thanks to being recorded on blockchain technology, each transaction is extremely secure. Anyone can look at the action while not being able to see the identity of the parties.
Additionally, blockchains cannot be changed or tampered with, providing crypto users with the reassurance that their financial movements will be safe.