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Traditional financial institutions (banks, insurance companies, etc.) have a vested interest in the status quo, since their business model is built around servicing the old economy. As a result, any disruptive innovation in the financial sector, such as cryptocurrencies, has met with heavy resistance.
Decentralized finance, or DeFi for short, emerged with the creation of Ethereum in 2013. However, in 2016-2017, it made real money thanks to the support of Ethereum developers and some entrepreneurs, and financial investment experts. To set things straight and clear up any misconceptions: Defi includes various financial applications with cryptocurrency or blockchain that aim to eliminate intermediaries between parties in financial transactions.
In traditional financial services, people pay interest rates to those who lend them money. This behaviour is known as “passive investing”. In a decentralized financial system, people pay interest rates to those who lend them money using smart contracts. In this way, decentralized finance is building a new economy, a new niche, and a new paradigm.
The crypto-finance paradigm is still in its early stages, but it’s growing rapidly as the main driver behind a global revolution in finance. In the near future, this paradigm will have its practical applications in sectors such as insurance, real estate, and the stock market. After all, the electronic ledger is a perfect tool for the reconciliation of all kinds of data, from various sources.
Most of DeFi’s applications are built on Ethereum. The first and most important application of DeFi is MakerDAO, founded by Rune Christensen. Ethereum, in short, is an open-source platform that uses blockchain technology to create and run decentralized digital applications.
Development of the DeFi system in subsequent years
DeFi is a rapidly evolving ecosystem of blockchain-based financial products that aim to replicate or extend the capabilities of traditional financial institutions such as banks, payment processors, clearing houses, etc.
The DeFi is presented as a solution to the problems of traditional banks and financial institutions and shows how it could eventually replace the old real-time system. Regardless of the technology or platform used, deFi systems are designed to eliminate intermediaries between the parties to the transaction. The volume of token trading and smart contract money in its ecosystem is growing exponentially, proving that the concept is not going away.
According to DeBank, DeFi currently has net assets of approximately $60.5 billion. DeFi offers an affordable approach to managing financial transactions. As the name suggests, it is not under the jurisdiction of states and is modified by central financial institutions. This removes the dependence on third parties and gives users full control over their transactions while allowing them to remain anonymous, as all transactions are conducted through smart contracts on the blockchain. Transactions and exchanges of crypto-currency can be made from anywhere, ensuring financial inclusion.
Although there are no clear regulatory guidelines on DeFi issues, there are some countries where individual cases are examined by national commissions. While promising, the DeFi also raises new policy and regulatory considerations.
Financial regulation in the United States involves intermediaries, and it applies regulation to intermediaries to regulate financial markets and related activities in their entirety. As a result, regulators and policymakers may find that BeCeFi takes them into unknown and untested territory.
Why will DeFi take over the world?
The decentralised financial sector has grown rapidly in recent years. Cryptocurrencies and DeFi ethics are taking baby steps into the traditional financial sectors, amid a saga surrounding GameStop and WallStreetBets. At some point, the question is no longer whether DeFi becomes a major factor in the world economy, but how creatively it develops and to what extent it becomes a force that can benefit the entire population. One of the keys to taking DeFi in a profitable direction will be the integration of advanced decentralized artificial intelligence. So far, few DeFi projects have used AI, but we could well see AI integrated into the next wave of DeFi’s operations later in 2021 – and perhaps even in a way that allows DeFi to drive decentralized tech startup projects with much more speed and efficiency.
There is no doubt that the DeFi is a major player in today’s financial firmament. It is not a question of offering new toys to speculators, nor of providing more sophisticated financial instruments to those who prefer to keep their assets outside the control of centralised authorities. DeFi has the potential to become much bigger, but the key to making a really big impact will be to expand DeFi beyond Bitcoin (BTC) and Ether (ETH) to a wider range of low-liquidity crypto-currencies. Since 2020, DeFi has spawned a vast network of platforms and protocols that allow users to exchange, trade, deposit, lend and borrow cryptocurrencies for revenue and growth. Such cascading activity in this area has not been observed in traditional financial markets for decades. This article contains no investment advice or recommendations. Any investment or business transaction involves risk, and readers should do their own research before making a decision. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph. Neeraj Khandelwal is the co-founder of CoinDCX, an Indian cryptocurrency exchange. Neeraj believes that cryptocurrencies and blockchain can revolutionize the traditional financial world. His goal is to create products that make cryptocurrencies accessible and easy for a global audience. He specializes in the cryptocurrency macro space and closely tracks the performance of global cryptocurrencies such as CBDC and DeFi, among others. Neeraj holds a degree in Electrical Engineering from the prestigious Indian Institute of Technology, Bombay.Today, the traditional finance industry is the most fragmented industry in the world. The industry is highly related to the development of new technologies and it is considered the most important sector in the world. Therefore, the traditional finance industry will experience a series of changes due to the new technologies.. Read more about visa and mastercard bitcoin and let us know what you think.
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