Decentralized finance, or Defi Tokens, as it is known, is a term that describes a multitude of applications powered by blockchain technology, which are aimed at providing peer-to-peer alternatives to the conventional financial institutions and services, such as banks. Decentralized finance has generated a great deal of excitement in the last couple of years and it continues to power ahead. Therefore, it is not surprising that it has attracted huge amounts of capital and has offered solid returns to investors. One of the primary reasons for the growth of DeFi is that it promises to provide investors and customers with a lot of benefits.
This includes eliminating oversight and intermediaries and improving the accessibility of financial markets for retail investors, along with creating new investment opportunities for people. How can DeFi offer these benefits? Decentralized finance relies on the characteristics of blockchain technology to offer some of the prominent benefits below:
- Permissionless
The identity of decentralized finance lies in the term ‘decentralized’. This is considered one of the most notable traits of blockchain because it eliminates the need of having to depend on corporations. In addition, thanks to decentralized finance, there is no longer any need to depend on any institutions for data storage, oversight, server space and a number of other factors. The purpose of blockchain networks is to ensure that transaction histories are available to all members.
This can be particularly handy where banking and finance is concerned, as DeFi can offer every individual effective and simple access to all kinds of financial services. This decentralized nature is also applicable in the case of DeFi applications.
- Immutability
Blockchain is considered immutable because of the use of consensus algorithms like proof-of-work (PoW) and cryptography. DeFi is able to offer people true immutability in the world of finance. This means that no records that exist on the blockchain network can be manipulated by anyone. In this way, DeFi is also able to provide security because this ensures that financial transactions cannot be changed or manipulated in any way and are visible to everyone.
- Transparency
Along with immutability, you will find that decentralized finance also offers transparency to the users, which has added to its appeal in the long run. It is able to offer better transparency because the distributed ledger features of the blockchain allow everyone to keep track of the activities and transactions taking place. Thanks to the cryptographic principles, information is only added to the blockchain after it has been authenticated and verified.
This ensures that the information is correct and once it has been added, immutability ensures it cannot be altered. Lastly, thanks to distributed ledger technology, people can enjoy transparency and this has made DeFi applications extremely appealing because they can improve due diligence. In fact, they can also be used for identifying potential scams and avoiding them altogether, along with any negative business practices that exist.
DeFi applications have a proper audit trail, which makes it easy to identify who has made changes to a transaction, when and what and this ensures that the integrity of financial ecosystems is not compromised.
- Tokenization
It is not possible to talk about DeFi without talking about tokenization. The ability of introducing crypto tokens has been introduced because of the smart contract capabilities of Ethereum, which powers most of the decentralized finance platforms. These tokens basically work as digital assets and have different uses and features. They can be used for achieving various functionalities. For instance, real estate tokens can be used for achieving fractional ownership of properties. In addition, tokenization also offers people better exposure to other assets, both digital and physical. These could include gold, oil, fiat currencies as well as digital currencies.
The DeFi applications that have been introduced, such as lending and borrowing applications as well as savings applications, have also added to the benefits of decentralized finance and the space is expected to see plenty of growth in the future as well.
