DeFi, or simply put decentralised finance is based on blockchain to provide a transparent ecosystem for an open and a decentralised banking. The first-ever cryptocurrency, bitcoin was invented amidst the biggest financial crisis for the purpose of decentralised finance. The notion was to create an alternative to traditional finance where trust is placed in the banking institutions and the government. Ethereum followed its suit, however with a much larger set of applications like smart contracts, DAOs, etc.
In a DeFi network, the users are in control rather than a central authority. Therefore, one could argue a lack of accountability. However, its popularity is driven by factors such as immutability, trustlessness, and encryption besides the automatic execution with a pre-defined set of instructions for smooth execution of any banking activity. One another example of a DeFi is Dai which is a ‘stablecoin’ unlike ethers (ETH) and bitcoins. The value of Dai is pegged to the US dollar and it is borrowed or bought against DAI.
DeFi usually relies on traditional banks to act as intermediaries. Since the data is not stored on a single location and the processing is not based on a single server, the single point of failure is eliminated. DeFi has been increasing in European countries. Open banking platforms are on the rise and many consumers are shifting to such platforms so that they may control the data that is being shared on their behalf. However, just like any disruptive technology such as blockchain in the finance sector, DeFi applications are not immune to anti-money laundering (‘AML’) requirements. Since no validation from third parties is required in DeFi, the data which is being transacted through a DeFI application may be publicly made available on the blockchain. This may at times include the entire balance sheet of a bank, hence increasing accountability and transparency in financial transactions. What is important to note at this point is the application of DeFi is jurisdiction centric. While European countries favour the application of DeFi to remove the risk of another Wirecard scandal, countries like India have not yet divulged on their stance to formulate regulatory regime for DeFi platforms.
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