What you need to know about Decentralised Finance (DeFi)

What you need to know about Decentralised Finance (DeFi)&nbsp | &nbspPhoto Credit:&nbspiStock Images

Given that the term cryptocurrency has been so much in news in the last two months in India, even those who were oblivious to this domain have gotten intrigued, and are trying to understand all about the world of crypto, blockchain and Decentralised Finance (DeFi).

If we were to explain the term in the simplest of ways, then DeFi can be defined as a permission less infrastructure, secured by encryption that enables people and businesses to perform transactions directly with each other, without needing institutions to act as intermediaries. Doing away with the need for banks and brokerage firms, customers can access financial products directly on a decentralised blockchain network. This way customers are less susceptible to manipulation by centralised authorities, less exposed to central points of failure and saved from paying any additional fee that would have been charged by a middleman.

Decentralised Finance is based on a secure distributed ledger system which is similar to that used by cryptocurrencies. It allows members to securely verify, execute, and record their own transactions without relying on a middleman.

The key components of Decentralised Finance technology are stablecoins, software and hardware that facilitate development of applications.

Difference between Centralised and Decentralised Finance

In Centralised Finance, the money is under the custody of banks and corporations that are designed to make money through this model. These third parties facilitate movement of money between parties, and charge a fee for using their services.

Decentralised Finance, on the other hand, eliminates the role of intermediaries by allowing users to conduct financial transactions through programmatic rules encoded within smart contracts. One can, from any part of the world, lend, borrow, swap assets and trade just by using the internet and a digital asset wallet. The most popular Blockchain on which DeFi projects are deployed is Ethereum.

Moreover, it gives the users more control over their money via personal wallets and trading services. Transparency and traceability are the key components that attract individual and institutional interest in DeFi. Decentralised Finance protocols include decentralized exchanges and lending platforms.

DeFi in India

Decentralised Finance is still in the evolving stages. In India, while the cryptocurrency market is unregulated, the DeFi segment has seen considerable growth with the rise in interest in crypto assets. According to the 2021 Global DeFi Adoption Index by blockchain data platform, Chainalysis, India ranked sixth in terms of DeFi adoption, preceded by US, Vietnam, Thailand, China and the UK (in the same order). The widespread adoption of DeFi can be linked to the increasing investment in cryptocurrency in India, despite the uncertainty regarding the regulatory mechanism. Chainalysis data also suggests that the DeFi adoption is strongest in high-income countries where cryptocurrency usage has been around for a much longer time.

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