defi: Explained: How DeFi could one day liberate finance | #cybersecurity | #cyberattack


Evolution is the answer to everything that exists, and finance is no exception.

Since the financial crisis of 2008, many practices of governments, central banks and entrenched players in the sector have been called into question. The birth of Bitcoin in 2009 gave the world — or at least a part of it — the tools needed to establish another kind of financial system, one based on decentralised consensus, not centralised fiat.

Decentralised finance, or DeFi for short, is a system in which customers can access financial products directly on a decentralised blockchain network, without the need for middlemen such as banks and brokerages.

The aim is to democratise finance by replacing centralised institutions such as banks with direct, peer-to-peer relationships. Every financial service we use today — savings, loans, insurance and much more — could one day exist on a blockchain, not in a bank.

Also read:
Neobanks, the next evolution of banking

That’s because decentralised finance platforms offer an alternative system, not simply a plug-in to the existing banking and finance systems. These platforms are structured to become independent from their developers and backers over time and to ultimately be governed by a community of users whose power comes from holding the protocol’s tokens.

STARTUP ROCKSTARS IN 2021

Sign-in to see our list of the most promising startups of 2021



According to a 2020 report in the Journal of Business Venturing Insights by Elsevier, “Blockchain technology can substantially increase the scope and efficiency of peer-to-peer transactions, turning previously infeasible business models into viable ones. Empowered by blockchain technology, financial services can become more decentralised, innovative, interoperable, borderless, and transparent.”

Tools of DeFi: smart contracts and dapps

‘Smart contracts’ are programmes that run on blockchains and can be triggered automatically when certain conditions are met. These smart contracts help developers build far more sophisticated functionality than merely sending and receiving cryptocurrency.

For example, a smart contract could be used to establish a loan agreement between two people. If certain terms are not met, the collateral could be liquidated. All of this would happen automatically through computer code, doing away with the need for a bank or any other middleman.

Smart contacts such as these are used to build decentralised apps, or dapps for short. Dapps are like normal apps and offer similar functions. The key difference is that they are run on a peer-to-peer network, such as a blockchain, which means no single entity has control of the network.

The risks of DeFi

Decentralised finance, like Bitcoin itself, is still at a nascent stage. The total value currently (as of November 3) locked in DeFi contracts worldwide is about $107 billion,
according to DeFi Pulse.

Being a recent innovation, DeFi comes with its share of risks and downsides.

Hacks and scams: DeFi is still riddled with hacks and scams such as DeFi “rug pulls,” in which hackers drain a protocol of funds. That’s because many DeFi platforms run on open-source smart contracts, which gives hackers the chance to probe these networks for weaknesses.

In July, DeFI platform Poly Network was hit by hackers, who pulled off the biggest ever cryptocurrency heist. They stole $613 million in digital coins, only to return tokens worth $260 million less than a day later.

No backup: Just like your bank account, DeFi and cryptocurrency wallets must be secured with private keys. A private key is a long, unique code known only to the wallet’s owner. Good thing, right? The problem is that if you lose your private key, there’s no way to recover your funds. Ever.

DeFi in India

In October, ET
reported that the Reserve Bank of India is looking to red-flag DeFi platforms as India does not have any regulation to deal with cryptocurrencies, let alone DeFi.

“There is no clarity around regulations on cryptocurrencies so platforms offering decentralised financing or crypto banking are operating in a regulatory vacuum. Also, which regulator should monitor these platforms that offer cryptocurrency-based banking is also a question,” Rashmi Deshpande, partner at law firm Khaitan & Co, told ET.



Original Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

+ 53 = fifty six