What is DeFi? How it works and its future - ET BFSI (2024)

• Fintech
• 2 min read

DeFi — short for Decentralised Finance - is an emerging and buzzing financial system. Using secure distributed ledgers, this new vision aims to eliminate intermediaries such as brokerages, exchanges, or banks to conduct financial transactions through blockchain technology.

While the infrastructure for DeFi and its regulation are still in nascent stage and under debate, DeFi is attractive to some consumers.

This is mainly because the system allows consumers to essentially “become the bank” and– bypass the fees that banks and other financial companies charge, hold money in a secure digital wallet, and process transactions without needing approval within a short time.

The components of DeFi are stablecoins, software, and hardware that enables the development of applications.

Centralised Finance Vs DeFi

The system of centralised finance, where the underlying motto is the point of central control, is full of third parties such as banks, brokerages, or exchanges.

These institutions facilitate movement of money between the transacting parties, with each one charging fees for using their services.

Since history, centralisation in finance has been considered a desirable measure and maintainer of stability in global financial processes, and more secure and stable than personal management.

However, as we find ourselves in a new era, issues with centralised finance such as higher costs, frauds, etc have been highlighted by some individuals.

In contrast, the elimination of centralised finance models enables anyone to use financial services anywhere regardless of who or where they are with more control over their money through personal wallets and trading services that cater to individuals.

How does it work?

The goal of DeFi is to provide many of the financial services that customers and businesses are provided currently including loans, interest on deposits, payments; however with the use of decentralised technology.

In a nutshell, DeFi creates new infrastructure to deliver similar financial products and services, not so much by changing what is delivered but rather how it is delivered.

To do so, DeFi uses the blockchain technology and smart contracts, among other tools. A blockchain is a decentralised ledger of all transactions across a peer-to-peer network. Blockchains are widely known for their role in cryptocurrency systems.

In the blockchain, transactions are recorded in blocks and then verified by other users. If these verifiers agree on a transaction, the block is closed and encrypted and another block is created that has information about the previous block within it.

What does the future hold?

According to Gaurav Dahake, CEO & Founder, Bitbns, there is a lot of potential for decentralised applications based on smart contracts to start serving as middlemen between institutions as bond settlements in daily transactions happening across the country.

"This will allow for a more open and financially inclusive marketplace where pricing is determined by market forces and parties transact using secure technology on a public blockchain. By 2030, 10% of all global transactions would happen through crypto and DeFi would play a major role in it," he said.

Join the community of 2M+ industry professionals

Subscribe to our newsletter to get latest insights & analysis.

Download ETBFSI App

• Get Realtime updates
• Save your favourite articles

Scan to download App