- DeFi, it offers a wide range of lending and borrowing services.
- Traditional banking solutions it eliminates the need of an intermediary and profit that is generated from them is huge.
- DeFi promises to revolutionize the financial system by providing peer to peer services, insurances and so on. No doubt this technology has become a hot topic.
Over the past few months, the popularity of the decentralised finance platforms has appreciated enormously. Almost every day we see articles with Defi in their headline. Most commonly referred to as DeFi, it offers a wide range of lending and borrowing services. However, unlike traditional banking solutions, it eliminates the need for an intermediary, and the profit that is generated from them is huge. DeFi promises to revolutionize the financial system by providing peer to peer services, insurances, and so on. No doubt this technology has become a hot topic.
DeFi Makes Thing Easier Without Requiring a Middlemen
Protocols like Compound, Kyber Networks, BlockFi, Aave have become prominent names of the DeFi sector. Some of them provide loans for short term liquidity whereas some of them makes collateral loans much more accessible. Moreover, cryptocurrencies can be used as collaterals. What makes these platforms popular is the decentralised nature. They do not rely on competent authorities for regulation and they generally run on set of codes that are known as smart contracts. Hence, almost everyone in the world with a proper internet connection can access them.
Challenges to Solve
Some people think that DeFi is the future. And then some find DeFi scary because it has no regulatory authority. And we cannot simply ignore the fact that the DeFi industry can be a subject to market manipulation because it has no higher system to supervise its activities. The DeFi platforms have also suffered in providing unsecured loan services to users. Generally it requires a collateral which is often greater in value than the amount of loan. This is done in order to protect them against the credit risk because DeFi misses out opportunity to claim financial credit. And the heavy collaterals generally lessen the profit.
Cooperation From Traditional Institutions can Help in Blooming the Industry
The best way for DeFi platforms to cope up with this is to introduce credit information in its systems. This may be a lengthy and inefficient process but it can leverage the usability of the platforms for the users. We can say that DeFi is in its infancy but we cannot deny that it has an immense potential to change the payment, lending, and borrowing services around the globe. However, this requires both trust and cooperation from traditional institutions. Linking the decentralised data with the bank and credit information can help to mend the gap between DeFi and traditional finances. This way DeFi platforms can reform the global financial infrastructure.
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