Decentralized Finance (DeFi)

Decentralized Finance (DeFi)

Decentralized Finance (DeFi). The buzzword of 2020. Interest in so-called decentralized finance is growing exponentially. Is that justified or is it the next bubble in blockchain land after the ICO hype of 2017?

You may have heard about it already. In short, it is the delivery of financial products using decentralized technology. Products for savings, loans, asset trading, insurance and mortgages can be taken out and traded with DeFi by anyone with an internet connection without the intervention of an intermediary. Direct, transparent, automated interaction between provider and buyer. There is no longer a central authority, company or body that offers, approves and monitors these products. User autonomy. Safer, faster and cheaper. The ultimate form of automated trust.

Of course, DeFi first of all raises the eyebrows of the traditional banking sector. “Cut out the middleman” is not an attractive scenario. And governments also see various risks in the absence of control options. Instead of traditional governance models, it is now the (transparent) software code that determines. Still, researching and testing the usability of DeFi is harder than you think. For example, worldwide attention is paid to DeFi platforms such as Compound and AAVE. Here you can lend cryptocurrency at an attractive ‘interest fee’ (possibly in real euros) without the intervention of an exchange or bank. With a wallet on your smartphone. The idea is that you bet (lock) cryptocurrencies to serve as collateral so that others can borrow them from you for an interest fee.

This blockchain application makes the bank as a ‘middleman’ superfluous. And it is cost-effective and anti-discriminatory. But there is no one anymore to keep an eye on you or to help you with a wrong transaction. You are entirely responsible yourself and must also have confidence in an underlying blockchain protocol.

DeFi provides an alternative for every financial service. But then without the intervention of a ‘trusted party’. Supply and demand are brought directly together by smart software. And by means of smart contracts, the financial agreements are recorded and implemented in an unchangeable and transparent manner. Nobody has the ability to influence, block or modify transactions anymore. And, considering the political situation in a number of countries in the world, that is quite handy! Given that nearly 2 billion people on the planet do not have access to any banking service, DeFi may well be the “killer blockchain app” for years to come.

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