What are DeFi and Crypto?
Cryptocurrency or crypto is the name given to virtual currency, which exists neither in paper nor metallic form like traditional currency, but only digitally. It is not a physical entity but still has value and can be used the same way traditional physical currency is utilized. Just like traditional currency is managed through centralized systems such as banks and financial institutions, these digital assets are also managed; however, the mechanism is the entire opposite and is called Decentralized Finance (DeFi).
The term DeFi stands for Decentralized Finance and is the mechanism or the electronic system in place upon which cryptocurrencies are traded virtually across the globe. Thus, DeFi and cryptocurrencies together form the virtual currency ecosystem, which is growing fast as a parallel to the traditional centralized banking systems we are all accustomed to.
Features of DeFi and Crypto
In traditional USDT price or banking systems, such as financial institutions and banks, one must be subservient in many ways to the regulations of those institutions. There are requirements for the bank to scrutinize each transaction, and the bank can reject any transaction based on its policies. The transactions also take considerable time and paperwork. Banking systems require members to open accounts in banks, which require lengthy legal documentation. However, in Decentralized Finance systems, the transaction time is drastically reduced, and only minor identification is needed for a user to be registered, compared to traditional banking systems.
Thus, access to financial services is greatly increased in DeFi for individuals who may not be financially stable and wealthy but would still require to transact. Anyone who is using the DeFi system will be trading in cryptocurrency and vice versa also holds. Anyone who is trading in cryptocurrency is an automatic user of DeFi.
The key characteristic of DeFi systems is the peer-to-peer capabilities they offer. Two individuals who own cryptocurrency can agree to perform a trade transaction with each other. This provides much-desired autonomy to the transacting parties. Unlike traditional financial transactions, there is no requirement for the two parties to be located physically close to each other.
DeFi members can, in different parts of the world, simply connect virtually through the internet. Members can buy, sell, lend and borrow at their will and convenience based on their cryptocurrency balances and requirements. While the autonomy afforded is great, the literacy rate of users also must be high for them to use DeFi and cryptocurrency. The user must be able to read and navigate through the digital interface on their computer or phone. The prerequisite for using both DeFi and cryptocurrency, therefore, is not just technology but also user literacy.
Blockchain is the technology that enables DeFi systems. It is secure and publicly accessible virtually. Each virtual financial transaction is stored in a block, and these transaction blocks are connected, forming a Blockchain. Stringent security checks are in place to ensure the data integrity of Blockchains. Similar to a domino effect, if one block is altered, it will affect the other connected blocks. Therefore, it is highly difficult to hack and tamper with Blockchains and cause disruptions in the virtual currency markets through such cybercrimes.
Who uses DeFi and Crypto?
While Decentralized systems and DOGE/USDT eliminate the need for physical proximity of the transacting parties and provide access to anyone in any part of the globe, it also requires a significant level of computer literacy which is not prevalent currently in many of the world’s populations. DeFi systems and cryptocurrency is a revolution in the financial world.
However, this facility is available exclusively to the wealthy class, which is literate and has access to technology. In third-world countries, for example, where basic amenities like food and shelter are still not accessible to many, it is unimaginable that the general public would be able to engage in cryptocurrency trade on DeFi systems anytime soon. For such people, centralized banking systems are even inaccessible.
They completely rely on traditional paper currency and coins for their trade and market needs and perform financial transactions like buying, selling, lending, and borrowing with parties they are physically present with. They do not have access to computer hardware and the internet, and thus DeFi and cryptocurrency are beyond their reach.