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The world is facing a pandemic, and our global financial infrastructure has been put to the test. But even in the face of multiple ground-shaking events, decentralized finance (DeFi) managed to grow. In these dire times, DeFi’s blockchain-based technology proved to be a savior for many, revolutionizing the finance sector.
In simple words, DeFi is a blockchain-based technology that is an alternate form of finance. Unlike conventional finance, it does not depend on central financial intermediaries, thus effectively cutting the cost a great deal while simultaneously increasing the privacy and security of a transaction. This is done by utilizing the smart contracts feature on blockchains, generally Ethereum.
As of July 2021, DeFi’s market cap is almost $80 billion and is expected to rise more in the future. The visible growth and support of DeFi can also be tracked in the ever-increasing Total Value Locked (TVL) in the DeFi world.
After global financial systems collapsed in 2008, governments and central banks of major economies made a commitment. They decided that never again would they allow the banking system to threaten our economic and social well-being. Since the 2008 crisis happened because of the extreme risk-taking by banks, the finance sector grew to play it safe by being less experimental and rejecting any transformation that would require changing the whole financial framework.
The global pandemic was again a fact check for the banking sector when the socio-economic life of many was wrecked. They now need to make a sustainable and robust recovery from the disastrous economic effects of Covid-19.
The great reset
Amid the ongoing pandemic, in June 2020, the World Economic Forum(WEF) came up with a program called “The Great Reset.” Financial systems realized that they need to change the global economy from its fundamentals. The notion is that there is a need for society to acknowledge the economic issues caused by the Covid pandemic and anticipate further challenges the world might face. Blockchain can help finance a great reset, and DeFi can lead this revolution.
DeFi is a blockchain-based ecosystem that puts the community first and provides financial services built on distributed networks that do not have a central authority. That means no individual governs the organizations; rather, they are governed by the community members.
In current financial systems, banks play an imperative role. They are the only major players and are always in a position of power. DeFi is a community-managed program.
Defi strives to build a more fundamentally functional financial landscape enabled by blockchain technology. With the adoption of blockchain technology, the banking system will benefit from the following three aspects the most:
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