Wharton University in their paper ‘DeFi Beyond the Hype’ describes Decentralized Finance as a term for ‘decentralized applications (DApps) providing financial services on a blockchain settlement layer, including payments, lending, trading, investments, insurance, and asset management.’
Decentralized Finance, or DeFi, is a generic term to describe peer-to-peer financial services on public blockchains. It aims at eliminating third parties like banks and exchanges from a transaction between two entities. This is what gives it the attribute of decentralization. DeFi makes use of blockchain technology and its elements like wallets, stablecoins, DAOs, oracles, crypto assets, smart contracts to provide financial services without the involvement of a central authority.
Major financial services offered by commercial banks are also covered by DeFi through various DApps. DApps are Decentralized Applications that use blockchain (majorly Ethereum) to connect two transacting parties.
Some of the services are listed below –
In Centralized Finance, a user makes all transactions through a commercial bank or other financial institutes. But the first step is to open an account with the entity. Accordingly, you need to supply your proof of identity, personal credentials, source of funds, assets held, and others. However, some people do not have access to proper documentation. Whereas some others do not even have banking facilities available to them. Indeed, people in third-world countries and those who are stuck in conflicts face these difficulties.
However, DeFi does not have such restrictions. All you need to have is a digital wallet, and you get access to all the services offered by DeFi. Besides, blockchain transfers are secure and anonymous. This means that sharing your personal information is not a requirement. Furthermore, since there is no intermediary, you do not need permission to move or transfer any of your funds.
Moreover, investing in traditional banking institutions leans towards biases and is prone to favoritism. For example, certain lucrative investment opportunities are only available to people belonging to a certain income group or to those having connections. Thus, those with more money tend to make even more money. In conclusion, what makes DeFi the need of the hour is the fact that is a community-driven financial concept, that is non-discriminatory and provides equality. Thereby, it entrusts ownership of the system to a network of users, rather than a third party.