Decentralization means for a particular task or a process there is no central authority or a person who is managing the process but the participants look out whether the process is going as intended or not. For understanding the need of Decentralized Finance (referred as DeFi), we need to understand lacunae in today’s centralized system. We are so much dependent on the centralized system that our loans, saving plans, insurance and other financial aspects are managed by some other middle party. We rely on them without taking into consideration the risks associated with the technologies they use to secure our data or might be fraud or simply some mismanagement from there side. The number of cybersecurity threats are increasing day by day in which the people are facing huge financial losses. So considering the impacts of these problems, after research on decentralization and blockchain for years, DeFi comes to rescue.
Decentralization gets into the financial aspect with the idea of smart contracts, where the transaction records are maintained on an immutable ledger. No third party is involved in the network, the authenticity of the transactions is verified by the other nodes in the network thus creating a peer to peer connection.
View this article https://kartikrane360.medium.com/why-should-you-trust-on-a-protocol-following-trustless-policy-the-smart-contracts-7110ae3a6a88 for detailed information regarding smart contracts. In short the smart contracts are a code segment where the rules of the transactions are defined. This ensures the transactions are taking place as intended which eliminates the role of middle man. We can make our own smart contracts with our own set of rules on ethereum platform. Ethereum has its own currency ‘ether’ but unlike blockchain (which just deals only with the transaction of money) it helps us create decentralized applications (dapps).
Ethereum is one of the most important platforms in blockchain, for more detailed information on ethereum click on this link https://kartikrane360.medium.com/ethereum-a-notable-reform-in-blockchain-technology-d34e5b0c6c93 . One of many great Dapp examples is DAI Stablecoins, which is built on Ethereum (ERC-20 token).
DAI Stablecoins are pegged to US Dollars which itself tells how much solid the currency is. We so far came knowing how the decentralization works and its financial components but the most important thing is the crypto exchanges, where would the borrowers and lenders make there transactions? Do they have to understand the smart contracts? The answer is NO! Learning and understanding smart contracts is always optional, there are many decentralized exchanges available which will do the job. Wazirx, Compound, Coin DCX are some exchanges where you can buy cryptocurrencies and analyze the crypto market the same way stock market analysis is done. DeFi is in its early stages where most of the people are not aware of its significance but experts are constantly upgrading themselves and switching to decentralization where people no longer have to just ‘TRUST’ some centralized party.
While seeing the advancements in the major blockchain platforms like Ethereum, Corda, Hyperledger and many more, blockchain will be the most in demand technology in coming years. Every business will have to adapt to this technology, which is more reliant than today’s financial system.