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2. What Is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is an arising monetary innovation in view of
secure appropriated records like those utilized by digital currencies. The framework
eliminates the control banks and establishments have on cash, monetary items, and
monetary administrations.
3. The basics of DeFi
DeFi uses a combination of existing blockchain-related technologies — such as
digital assets, wallets, smart contracts and auxiliary services including oracles — to create
a financial ecosystem capable of bypassing banks, brokers, exchanges and the other
middlemen who traditionally manage and process financial services.
4. The benefits of DeFi
● Transactions are in real time. The underlying blockchain is updated the
moment a transaction is completed, and interest rates are updated multiple
times every minute.
● Transactions are transparent. Every transaction on the Ethereum blockchain,
which accounts for more than 90 percent of all DeFi traffic, is broadcast to and
verified by other users on the network. This level of transaction data
transparency ensures any user can view network activity.
● Users can retain custody of their assets using non-custodial crypto wallets or
via smart contract-based escrow.
● Smart contracts are highly programmable and can be designed to automatically
execute, based on an infinite number of variables.
● DeFi data is tamper proof, secure and auditable, thanks to the use of blockchain
architecture.
5. The risks of DeFi
● DeFi technology is immature and has yet to be fully stress-tested at scale over
an extended period. Funds may be lost or put at risk. The DeFi platform
Compound, for example, suffered a serious glitch recently during which
customers were accidentally sent millions of dollars of crypto.
● A lack of consumer protection. DeFi has thrived in the absence of rules and
regulations. But this means users often have little or no protection when things
go wrong. No state-run reimbursement schemes cover DeFi and there are no
laws enforcing capital reserves for DeFi service providers.
● Hackers are a threat. While hacking is also a risk in traditional finance, DeFi’s
extended technological architecture, with multiple points of potential failure,
increases the so-called attack surface available to sophisticated hackers.
6. ● Collateral requirements are high. Nearly all DeFi lending transactions
require collateral of at least 100 percent of the value of the loan, if not more.
These requirements vastly restrict eligibility for many types of DeFi loans.
● Private key requirements. With DeFi and cryptocurrency, users must secure
the wallets used to store cryptocurrency assets. This is an important
requirement for both individual private investors and institutional investors
using multi-signature wallets. Private keys, which are long, unique codes
known only to the wallet’s owners are used to do this. If a private investor loses
their key, for example, they lose access to their funds forever.