Anbbit Learning | The Reasons Why Everyone Is Obsessing about DeFi Token Trading
As we all know that money was introduced as a medium of exchange and store of value. Initial types of money were not centralized. Agents accepted any number of items such as stones or shells in exchange for goods. Then with the development of society, the form of money has changed over time and the centralized financial institutions.
However, there are some key problems with centralized financial systems. For several centuries, we have lived in a world of centralized finance. The money supply is controlled by the bank, also there is a centralized banking system deal with the interest rate and influences the rate of inflation. The obvious barrier for business is to tolerate the limited access to the banking fields. A centralized financial system has many inefficiencies, including the high rate of interchange and remittance, costly transfer of the funds, direct and indirect brokerage fees, lack of security, and the inability to conduct microtransactions. Moving money from one institution to another can be unduly lengthy and complicated, which makes the interconnectivity. The current financial system is not transparent. The current list of competing lenders, however, all suffer from the system’s inefficiencies.
In the last few years, however, considerable progress has been made on a much different model — decentralized finance or DeFi. In this framework, peers interact with peers via a common ledger that is not controlled by any centralized organization. DeFi offers considerable potential for solving the above problem that the centralized system has.
Inefficiency
DeFi can accomplish financial transactions with high volumes of assets and low friction that would generally be a large organizational burden for traditional finance. DeFi creates reusable smart contracts in the form of dApps designed to execute a specific financial operation. These dApps are available to any user who seeks that particular type of service, A user can largely self-serve within the parameters of the smart contract and of the blockchain the application lives on. In the case of Ethereum-based DeFi, the contracts can be used by anyone who pays the flat gas fee, usually around 2.00 for a dApp feature such as leveraging against collateral.
To ensure that a dApps’ benefits and services are optimally priced, keeper rewards are often structured as an auction. Pure, open competition provides value to DeFi platforms by guaranteeing users to pay the market price for the services they need.
Another concept that also incentivizes efficiency is a fork. Forking creates an interesting challenge to DeFi platforms, namely, vampirism. Should inefficient or suboptimal DeFi applications exist, the code can be easily copied, improved, and redeployed through forking. Forking and its benefits arise from the open nature of DeFi and blockchains.
Limited Access
DeFi gives large underserved groups, such as the global population of the unbanked as well as small businesses that employ substantial portions of the workforce (for example, nearly 50% in the United States) direct access to financial services. The resulting impact on the entire global economy should be strongly positive.
Yield farming provides inflationary or contract-funded rewards to users for staking capital or utilizing a protocol. These rewards are payable in the same underlying asset the user holds or in a distinct asset such as a governance token.
IDOs democratize access to DeFi in two ways. First, an IDO allows a project to list on high-traffic DeFi exchanges that do not have barriers to entry beyond the initial capital. Second, an IDO allows a user access to the best new projects immediately after the project lists.
Opacity
DeFi participants are accountable for acting in accordance with the terms of the contracts they use. One mechanism for ensuring the appropriate behavior is staking. Staking is escrowing a crypto asset into a contract so that the contract releases the crypto asset to the appropriate counterparty only after the contract terms are met; otherwise, the asset reverts to the original holder. The transparent incentive structures provide much securer and more obvious guarantees than traditional financial agreements.
Centralized control
DeFi upends this centralized control by relinquishing control to open protocols having transparent and immutable properties. The community of stakeholders or even a predetermined algorithm can control a parameter, such as the inflation rate, of a DeFi dApp. The open-source ethos of blockchain and the public nature of all smart contracts assures that flaws and inefficiencies in a DeFi project can be readily identified and “forked away” by users who copy and improve the flawed project.
Lack of Interoperability
The possibilities for DeFi are substantial and new innovations continue to grow at a non-linear rate.
Tokenization is a critical way in which DeFi platforms integrate with each other. Because DeFi relies on shared interfaces, applications can directly plug into each other’s assets, repackage, and subdivide positions as needed. DeFi has the potential to unlock liquidity in traditionally illiquid assets through tokenization.
Decentralized finance provides compelling advantages over traditional finance along the verticals of decentralization, access, efficiency, interoperability, and transparency. Decentralization allows financial products to be owned collectively by the community without top-down control, which could be hazardous to the average user. Access to these new products for all individuals is of critical importance in preventing widening wealth gaps.
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