For a long time, global financial systems have been largely centralised. Traditional finance has relied on centralised entities like banks to act as intermediaries, courts to settle disputes, governments to provide regulation, and so on.
As such, financial data is not publicly visible to all, and financial assets are controlled by entities that transact in them based on the end user’s instructions.
In the last few years, a new type of finance – which has no central authority and provides end users full control over their assets – has emerged.
Known as Decentralised Finance (DeFi), this type of financial system comprises financial applications built on top of blockchain networks.
As blockchains are public and open source, DeFi is a transparent and permissionless way for users to interact directly with each other in peer-to-peer networks. In a way, the code or software governing the blockchain acts as the middleman, and as blockchains run on distributed nodes, there is no singular point of failure present in DeFi.
How DeFi works
In traditional finance, a financial institution’s firewalls may be compromised and funds may be lost in a hack. Or the institution may shut down. In DeFi, Decentralised Apps (DApps) running on a blockchain network continue to function even if few or several nodes on the chain go offline.
It follows from this lack of central authority that users aren’t required to input their government ID details, email, address or contact information in order to use DeFi.
Instead, users create a password when setting up blockchain-enabled wallets like MetaMask or Trust Wallet. They also get custody of a 12-word seed phrase to recover their account. During these steps, users share no personal information about themselves.
Once their wallets are set up, users can acquire crypto from exchanges like CoinDCX, WazirX, CoinSwitch Kuber, Coinbase, Binance, etc and withdraw the coins to their wallet. Once their wallets contain some crypto, users can begin using…
