- DeFi has made it cheaper, more reliable and more decentralized to handle one’s resources without the weight of heavy charges and the involvement of a third party.
- There are elements of DeFi that make the system more efficient than banks.
- DEXes run under codes, making them more decentralized and cost-effective.
Decentralized Finance, DeFi was created as a run-away from Centralized Finance, CeFi, including banks and other financial institutions. There is a recurrent fear of having your money but not having full access to your funds when needed. DeFi has made it cheaper, more reliable and more decentralized to handle one’s resources without the weight of heavy charges and the involvement of a third party.
With the recent crash of three major banks in the US (Silicon Valley, Signature and Silvergate banks), the fear of Centralized exchanges is staring into people’s eyes. In Africa, and Nigeria specifically, there has been a cash shortage due to the new naira policy where the country is changing old notes for new ones. To access their money stored in banks, they must line up for nearly two days to get the money without the surety that they will eventually get it.
With these defects, there is a need for Decentralized Finance. There are elements of DeFi that make the system more efficient than banks.
What makes DeFi more reliable than CeFi
DeFi runs under codes, and they do not require a user to trust them as they are just running on the instructions given that are not subject to change. Decentralized Finance runs under three main things.
- Cryptography- Protection of information through the use of codes.
- Blockchain- The underlying technology for DeFi transactions.
- Smart Contracts- They automate DeFi processes without intermediaries.
Elements of Decentralized Finance
Stablecoins are cryptocurrencies in the virtual world that matches their value to a real-world asset. Examples of stablecoins include DAI, Tether and USDC, their price tagged to the dollar. In DeFI, they are used as a store of value. For example, if one is trading bitcoin and there is speculation of the price dumping, they can convert their value to stablecoins to ensure that no value is lost.
Without stablecoins, traders must sell their bitcoin to centralized Finance like Coinbase or Binance. Coinbase will, in turn, send the money to your bank for you to withdraw. The problem with this system is that there are taxes and fees at three levels: From your coins to, say, Coinbase, from Coinbase to your bank, and from your bank to you. Buying back from fiat to bitcoin will follow the same steps and transactions, which becomes more expensive.
However, with stablecoins, one can only buy and sell at any convenience with minimal transaction fees (less than 1% of the amount traded).
Many countries across the globe limit and follow up on transactions made above a particular amount. But with stablecoins, a trader can always move any amount desired without government interference.
People are always travelling across countries with different currencies from their own. Consequently, they must visit a foreign exchange booth to get their home country’s currency. The fees accrued with these exchanges are high, sometimes up to 10% of the amount charged. In Africa, currencies constantly fluctuate in exchanges which could lead to a loss of value in the conversion.
However, one can use Decentralize exchanges for currency conversion, for example, Uniswap, Covo Finance, Pancake Swap, and many others. They allow for the conversion of coins to other coins, with transaction fees typically less than 1 per cent. Most DEXes work in a manner where investors pull their money together, and traders can trade that money. DEXes run under codes, making them more decentralized and cost-effective.
Borrowing and Lending
In Decentralized Finance, smart contracts offer loan services, such as AAVE and compound. Unlike banks, where borrowers need collateral to access loans, most loan platforms do not ask for exploitative loan approval terms.
DEXes allow users to deposit their funds with them and can offer credit to other traders with interest.
These elements have made Decentralized Finance stand out in a world where the government is trying to control people’s funds. When properly used and with extensive research, DeFi is a platform where traders can make a killing.