What Are The Benefits Of Decentralized Finance?

Decentralized Finance, or “DeFi” for short, is an entire finance industry whose alternative class of finance and lending operations is powered by the blockchain. Along with that comes all the features and benefits of the blockchain that have made cryptocurrencies, like Bitcoin (the first ever currency to operate using a blockchain), such highly valued and sought after commodities by online users, merchants, and investors.

But cryptocurrencies like Bitcoin and its silly, though well-capitalized cousin, DogeCoin (DOGE’s multi-billion dollar market cap is no joke even if the meme coin is), were created with a more simple purpose in mind than finance. They were designed from the beginning as simple payment remittances services (think PayPal or CashApp), with basic chequing and savings services for anyone who “holds” money at a bitcoin address for the long term.

A cryptocurrency user who spends out of a crypto wallet they have to pay for consumer goods and services— or purchases inventory or makes payroll for their small business using crypto— is getting all the benefits of blockchain as a decentralized, peer-to-peer platform, and any of the features and benefits unique to the crypto they’re using (such as more privacy, faster transactions, or lower fees).

But they’re simply making payments or holding their money on a blockchain platform. They’re not really engaging in finance, which is lending or borrowing at an interest rate that discounts the value of future money to the present. That’s where DeFi comes in.

overview of DeFi

What is DeFi? Read on for a brief overview of this exciting new frontier in the fast-growing cryptocurrency industry.

What is Decentralized Finance or DeFi?

Decentralized finance connects lenders with borrowers to transact loans over a decentralized, peer-to-peer (P2P) blockchain. The features of blockchain can be remembered using the acronym RIPCORD. A blockchain is revolutionary, immutable, public, collaborative, open, resistant to censorship, and decentralized. DeFi makes it possible for borrowers and lenders to meet and transact loans over a platform that is controlled by code, and not by institutions.

DeFi vs Crypto

There is a lot of overlap between DeFi and Crypto in that they share the characteristic features of the blockchains they operate on, but they’re not exactly the same. One way to think of it is that all truly DeFi tokens and platforms are a kind of crypto, but not all crypto is DeFi.

Decentralized finance is an entire industry within the broader cryptocurrency industry. It started out as a sub-sector of the crypto industry, with less than a billion in TVL (total value locked) in 2018, and over $100 billion in TVL by the end of 2021 at the height of that year’s bull market.

The Benefits of Decentralized Finance

Decentralized Finance offers users on both the lending and borrowing side enormous benefits that were not possible before the advent of blockchain on the Internet in recent years. With peer-to-peer lending, DeFi borrowers can gain access to loans without the roadblocks to access traditional finance that have stood in the way of investors with the capital to invest in new projects, who want to use finance for leverage to get a greater reward for their investment.

The Risks of Decentralized Finance

There are risks with decentralized finance, as there are with any kind of financing, even through traditional channels, and as there are with any online commerce over new and innovative platforms. A lack of regulation is a feature and a bug in this space, with a greater risk of loss to hackers, scams, and “rugpulls,” wherein a new project goes under. There are also high collateral requirements in much of the DeFi lending world for obvious reasons.

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DeFi Advantages and Disadvantages

Having to put up more collateral for loans, having less or no regulatory authority for protection of your funds, and having to have a high degree of technical know-how and the ability to navigate around the fast-growing decentralized finance platforms are all disadvantages. But players in this space trade them off for more control over their money, more access to liquid finance pools and lending peers on the networks, and more trust in code, platforms, and apps that they have earned the right to trust with their own technical expertise and research.

DeFi vs. Traditional Finance

Traditional finance operates through massive, slow-moving, highly-regulated (did I mention slow-moving?) lending institutions, often subsidiary operations of big central bank branches, lending fiat money to qualified lenders that meet all the institution’s, central bank’s, and government’s understandable, but cumbersome regulatory requirements. Traditional finance simply wasn’t designed to meet the needs of the typical DeFi borrower investing and trading in the cryptocurrency industry in 2022, and it can’t.

Examples of Decentralized Finance Cryptocurrency Tokens

Here is a list of some of the most popular decentralized finance cryptocurrency tokens by market cap around the date of publication of this article: Terra (LUNA), Lido Staked Ether (STETH), Wrapped Bitcoin (WBTC), Dai (DAI), Chainlink (LINK), Uniswap (UNI), Frax (FRAX), cETH (CETH), PancakeSwap (CAKE), and The Graph (GRT).

About Salman Zafar

Salman Zafar is the CEO of BioEnergy Consult, and an international consultant, advisor and trainer with expertise in waste management, biomass energy, waste-to-energy, environment protection and resource conservation. His geographical areas of focus include Asia, Africa and the Middle East. Salman has successfully accomplished a wide range of projects in the areas of biogas technology, biomass energy, waste-to-energy, recycling and waste management. Salman has participated in numerous national and international conferences all over the world. He is a prolific environmental journalist, and has authored more than 300 articles in reputed journals, magazines and websites. In addition, he is proactively engaged in creating mass awareness on renewable energy, waste management and environmental sustainability through his blogs and portals. Salman can be reached at salman@bioenergyconsult.com or salman@cleantechloops.com.
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