From the barter system to paper currencies, to digital finance, we have come a long way. While cash is still the king but digital currencies and digital payment methods are taking over rapidly. Decentralised Finance (DeFi) has been a game changer in recent times, which has been disrupting the entire financial organisational structure and the way payments and currencies work. In this article, we will see how DeFi works, and its benefits while also understanding how it is way different from CBDC and UPI.
Decentralised Finance (DeFi) is referred to different financial services that are performed using blockchain technology, especially on the Ethereum blockchain. DeFi supports most of the transactions, and functionalities of any bank such as borrowing, lending, buying insurance, trading, investments, earning interest on deposits, and a lot more. However, the time taken for performing the functions or offering the services is less due to no involvement of third parties and paperwork. It is all digital and direct between the client and the platform. Cryptocurrency, which is also one of the forms of DeFi, is popular globally and offers peer-to-peer payment services and other financial services without any intermediaries and is also not controlled centrally. This is why it is known as Decentralised finance, which is not centrally monitored and controlled.
Decentralised Finance or DeFi works through software or applications like the ones you use on your smartphone. These applications run mainly on the Ethereum blockchain and here you do not have to go through a complex onboarding process to use the applications. You can download the applications and start using the same.
Here are the top usages of DeFi apps in today’s world –
DeFi has been made to overcome the shortcomings of the traditional banking sector. In the conventional banking sector, there is a lag in every department due to manual procedures, which DeFi is mainly targeting to solve.
DeFi has been offering ‘open to all’ facilities, where you just need to create a wallet on any of these DeFi apps and then get started. You can even use the application as anonymous which is one of the best things about decentralised finance, however, this is a bit risky, as this increases the chances of fraudulent activities too.
DeFi apps are super flexible, unlike conventional banking applications. You can transfer, make payments, buy and sell, and make other transactions without paying any hefty fees or waiting for permissions. This also cuts down on the time taken for the transactions to happen. DeFi apps offer transactions which are faster than transactions happening on Wall Street as per some studies.
Now that you have an understanding of DeFi, let’s see how it is different from CBDC and UPI.
Whether it is DeFi, CBDC, or UPI, all will be a part of the future financial system. While UPI has become quite popular in India, and it is also getting accepted worldwide slowly, DeFi is still on its way to making its presence felt in this economy, and CBDC has just made its debut, so, we need to wait to see how it turns out to be.