Introduction to Defi & Impacts on Traditional Finance Systems.

By the acceptable definition of Defi, Decentralized finance (Defi) is a financial model built on blockchain that uses smart contracts, particularly to offer financial products and services without relying on an exchanger.

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Unlike Defi, Centralized finance, Cefi, offers financial services, and allows users to earn generate interest, and also acquire loans with their crypto assets, through a centralized authority.

In Cefi, trading involves a third party, there is a central authority. It requires the user to transfer crypto-assets or private keys to third parties. Third parties facilitate money movement between parties involved and coin orders.

Decentralized finance (Defi) differs from centralized finance (Cefi), in the sense that the former gives users more freedom and control over their money

Decentralized finance allows users to trade through the personal wallet and borrow money from each other, without a third party involved.

It has open-source protocols, built on blockchain, which gives room for personal empowerment, decision-making on trade choices, earning interest on money savings, and access to numerous financial product services from different nations of the world without any hindrance provided there is a secure internet connection.

A global financial crisis that occurred in 2008 highlighted the lack of transparency and resiliency associated with centralized financial institutions and the need for a more transparent and resilient system.

Decentralized Finance leverage blockchain technology, other than a central authority, which is inherently secure and transparent.

Smart contracts eliminate the need for central authorities and third parties. Third parties charge high fees while smart contract fee available on Blockchain are smaller.

These financial services and goods are: Trading, money lending and borrowing, asset management, and more. These financial services and products are managed by self-executing agreements that operate on the blockchain.

Smart contracts enable the automation of various financial processes, makes loan initiation and settlement easier.

Defi application space provide opportunities by allowing developers to develop financial applications that align with existing human-error free and secure procedures.

Through the innovative opportunity provided there is a room for development. More and more developments are experienced through the innovative potential available in Defi space.

As a result of this, traditional financial system, has been impacted and Defi is taking up the space as a more secure replacement, thereby giving users better control over their financial assets. For example, Decentralized Exchange (Dex), gives the user more control over their assets.

The competition between centralized finance and Decentralized Finance has caused CeFi to lose its long dominance as Defi exposed the inadequacies available in the traditional financial system.

Defi application also fix the security gaps and inconvenient fees that were present in CeFi.

As Defi leverage Blockchain to provide secure transaction. It records financial transactions which can also be audited. This makes the rate of frauds to be minimal.

Defi have more potential to activate. Though, there are also limitations attached to Defi which might hinder its adoption.