What is DeFi?
Decentralised Finance ("DeFi") refers to financial applications built on blockchain technologies, typically using smart contracts. Smart contracts are automated, enforceable agreements that do not need intermediaries to execute. Anyone with an internet connection can access them to perform financial transactions and many other activities.
What is it Used For?
DeFi consists of applications and peer-to-peer protocols developed on decentralised blockchain networks that require no access rights. The decentralised apps ("dApps") are used for easy lending, borrowing, or trading of financial tools. Most DeFi applications today are built using the Ethereum network, but many alternative public networks are emerging that deliver superior speed, scalability, security, and lower costs.
How Does DeFi Work?
DeFi was developed to create a financial system that is open to everyone and minimises the need to trust and rely on a central authority. DeFi has grown into a complete ecosystem of working applications and protocols that deliver value to millions of users. Assets worth over $239 billion were locked in DeFi ecosystems as of April 2022, making it one of the fastest-growing segments in the public blockchain space.
What are the Downsides?
- Rates can fluctuate, leading to trading becoming expensive;
- Power in these markets is centralised amongst a few large holders;
- Depending on the dApps used, one can experience high volatility; and
- Record keeping for tax purposes has to be maintained by oneself.
Conclusion / Legal Implications
For example, when a person buys cryptocurrencies with the intention of holding them for some period, the coins have no utility in that period, but with DeFi lending, an individual can put their cryptocurrency up as security and obtain loans. Small firms, however, find it difficult to obtain bank credit. DeFi innovation will be able to solve these issues in India through its smart contracts. Compound, one of the earliest and largest DeFi lending platforms, has issued billions of dollars' worth of loans according to its own tracker.
Financial markets can enable great ideas and drive the prosperity of society. Adjusting to the obstacles regarding the operation of this innovation, the system of modern decentralised finance is catching up. With more clarity around DeFi, it is likely to be included in the wider financial system as a fast, secure and available option.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.