What Is Defi?

This is the concept of a financial ecosystem living digitally on a shared infrastructure. A person can do, borrowing, lending, trading all through the internet sitting at home. No one has to go to the bank now. Digital banking has changed the world.

With DeFi, all the financial products are now available on the public blockchain. It means that a person can buy it easily. Now no one needs to go to banks or brokerages if they want to invest their money in something. Also, DeFi has made everything so easy and safe because to register on DeFi you do not need to verify your government-issued ID or address.

In DeFi, there is a peer-to-peer transaction. This whole transaction is completely transparent. A person gets to know all the fees he is paying and the product he is getting in return. DeFi system has removed intermediaries between the transactions. It means that you can communicate with the person you are doing a transaction with.

Inflection Point

What is an inflection point? The inflection point is when significant changes occur in the economy. When there will be a regulatory inflection point then it may create an ultimate battleground. As the lending practices will move to the front line.

Consequences

If an inflection point comes then the first consequence will be a new and more advanced era of technology. This new era will deeply affect the economy and social transitions. It will push both of these things into the deeper digital realm. People will be more likely to do everything through the internet than going to the bank physically.

Besides this positive consequence, there is also a negative consequence. There will be a systematic risk and also suboptimal outcomes for the government like in the early days of the internet. When the internet came out first, many governments put restrictions on it because they thought that it will lead them to war or create a bad environment in their country. The same thing, the government is thinking right now with DeFi.

Risk

DeFi has many advantages as it provides peer-to-peer transactions but it comes with some risks. It has replaced credit risk with contract risk. People have different views on it. Some say that it is better and some say it is not safe because in terms of credit risk they can blame the bank but when you have full control on your money and you get fraud then there is no one to blame. DeFi doesn't verify address or ID it means that you can't track the person you are doing the transaction with. So, it comes with the contract risk.

DeFi is currently in competition with the traditional financial system which is a shadow banking system. People are trusting DeFi more as it provides peer-to-peer transactions with transparency.

Why Better Than CeFi?

All the crypto trading is done with CeFi and CeFi is centralized finance, just like traditional banking. CeFi is used by big crypto companies like Binance, a Coinbase. These companies offer borrowing, lending, and margin trading through CeFi.

CeFi provides exchange safeguard money because the company takes responsibility for guarding your money. It is possible to prevent trade that is not through DeFi. With CeFi it is easy to convert Fiat currency into Crypto through Binance or Coinbase.

On the other hand, DeFi has some more advantages than CeFi lacks. DeFi provides successful transactions through contracts and users get to manage their funds. DeFi has a transparent financial system and also the transaction rates are very low than CeFi because no transacting parties are involved in it.

Challenges

There are some challenges that DeFi has to face such as it has low liquidity and its users face difficulty in switching between different blockchains. Also, as the DeFi is new so the number of traders is insufficient as compared to its users.

Role Of Chainlink

Sergey Nazarov who is the founder of Chainlink states that Chainlink provides the highest data quality, security, and guarantees smart contracts with timely execution. DeFi doesn't verify identity and address and as the transaction is peer-to-peer so there is high contract risk. So, to be safe from such risk, Chainlink verifies the supplier and customer identity to ensure safe transactions between the two. Chainlink is a widely used network for powering hybrid smart contracts.

Why $2 Trillion Will Flow into Defi?

These are not the accurate word that $2 Trillion will flow into DeFi but it is just a prediction that is getting stronger due to the increase in DeFi users. DeFi provides transparent peer-to-peer transactions so businesses are more likely to move into DeFi to save themselves from paying huge amounts of money on each transaction. Through DeFi, they can cut down their transaction charges. So, they will deposit their money into DeFi than in traditional banks so it is a prediction that $2 trillion from different business models may flow into DeFi and they will adapt Chainlink.