In 2022, when part of Europe is fighting over border establishment and we are witness to an event which is both gruesome and unacceptable. A new borderless and open-to-all currency Decentralized Finance, is slowly attracting banks and financial organizations to take it seriously.
Understanding DeFi will be easy, if we take a look at centralized finance first
DeFi is the catch phrase circulating across the financial circles; it is the short form of Decentralized Finance. This new format of finance, is independent and eliminates the need for a centralized organization to approve any transaction done through such a currency. DeFi is based on secure distributed ledgers similar to cryptocurrencies.
Centralized finance
In a centralized finance structure, banks act as the third-party felicitators, whose job is to help customer A initiate a transaction intended for customer B and vice versa. For every banking activity, a certain amount is charged, as the bank is an organization and it is our money on which they function.
Decentralized finance
Eliminates the third party factor, and allows the merchant and the buyer to transact freely using modern technologies like blockchain and Ai. The transaction is operated through peer-to-peer financial networks and is protocol protected. All you need is an internet connection and software to perform a verified transaction.
Main features of DeFi
- Available at all times – Anyone with an internet connection may use it anytime
- No fees or charges – Any transaction done via this medium is free of the charges that banks incur.
- Money is with you always – The currency is secure and held in a digital wallet instead of depositing it in a bank.
- Fast movement of money – Transactions are fast as there is no need for a bank to intervene.
Is Decentralised finance regulated in India?
Though the regulation road map is yet to be finalized in India, it can’t be overlooked by the government. The decision to launch the digital rupee by 2023 is a positive move towards accepting, decentralized finance and regulating it.
How does DeFi operate?
The working mechanism of decentralized finance is based on blockchain technology. A blockchain is a distributed ledger that is accessible by permissioned members to track and transact assets present in the network. The ledger is immutable and is available to all participants. A transaction is identified as a block of data; the data block holds all the information concerning the transaction. This block is linked to blocks before and after it. Together, they are linked to form an irreversible chain of data about the ownership of the asset moving from one place to another.
The future of DeFi?
Decentralized Finance is in its initial days, and is evolving. Though the system is unregulated it still can’t be ignored, and down the line this style of finance will be included by the government in the market.
The declaration to launch the digital rupee is a clear indication that Indian financial decision makers are serious about DeFi. Major Banks around the world are looking to use DeFi technology and make it a part of their ecosystem.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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