Why is DeFi Important?

Decentralized Finance, also known as DeFi, is one area of cryptocurrency that has generated a lot of interest from individuals and mainstream players in the past few years. This increased interest in DeFi has resulted in a significant increase in the value of all tradeable tokens employed in DeFi smart contracts. The total value of assets used in decentralized finance is now estimated to be over 100 billion dollars.

Numerous banking institutions are embracing DeFi and exploring opportunities to participate. Major asset management firms are also starting to take DeFi seriously as well.

In this article, we will talk about why DeFi is so popular and what makes it important.

Smart Contracts

DeFi works with smart contracts on blockchains, with the most common being Ethereum. Smart contracts are scripts and programs stored on a blockchain which are executed when certain criteria are satisfied. They keep track of events and activities according to the conditions of a contract or a transaction agreement.

Smart contracts aim to reduce or remove the need for intermediaries in transactions, automate transactions between parties, reduce fraud, and get rid of arbitration and enforcement costs charged by intermediaries and middlemen.

Open Financial Market

The goal of DeFi is to create an open, decentralized market for its consumers. DeFi paves the way for the emergence of a new dynamic financial market that is more decentralized, has fewer middlemen like banks and brokerages, and has the potential to be very rewarding for its users.

DeFi is also important because of the privacy and transparency which comes with it. Unlike traditional centralized banking, users of decentralized finance can maintain their privacy while also enjoying the benefit of transparency that comes with it. For example, to get a loan in banks is a very different process with DeFi. Customers have to provide a lot of personal information and are subject to scrutiny. Such prerequisites do not exist in DeFi. Rather than that, everything revolves on mutual trust and the protection of personal information.