Decentralised Finance (DeFi)

Source: DH

Context: The DeFi boom has raised national security concerns, with experts warning of its misuse for terror financing and money laundering.

About Decentralised Finance (DeFi):

• What it is? A blockchain-based financial system that allows people to save, borrow, invest, and transact without traditional banks. Works through smart contracts, decentralised apps (DApps), and peer-to-peer networks.

• A blockchain-based financial system that allows people to save, borrow, invest, and transact without traditional banks.

• Works through smart contracts, decentralised apps (DApps), and peer-to-peer networks.

• Origin: Rooted in the Bitcoin philosophy (2009) of decentralisation and transparency. Expanded with Ethereum blockchain (2015) and the creation of DAOs (Decentralised Autonomous Organisations).

• Rooted in the Bitcoin philosophy (2009) of decentralisation and transparency.

• Expanded with Ethereum blockchain (2015) and the creation of DAOs (Decentralised Autonomous Organisations).

• Aim: To democratise financial access by removing intermediaries. Provide inclusive, low-cost, borderless financial services accessible to anyone with an internet connection.

• To democratise financial access by removing intermediaries.

• Provide inclusive, low-cost, borderless financial services accessible to anyone with an internet connection.

• How it Works? Users create a crypto wallet (no KYC required). Transactions happen through smart contracts stored on blockchain. Services include decentralised exchanges (DEXs), lending, payments, derivatives, insurance, and creation of stablecoins. Governance managed by token holders in DAOs, not central authorities.

• Users create a crypto wallet (no KYC required).

• Transactions happen through smart contracts stored on blockchain.

• Services include decentralised exchanges (DEXs), lending, payments, derivatives, insurance, and creation of stablecoins.

• Governance managed by token holders in DAOs, not central authorities.

• Features: Disintermediation: Direct peer-to-peer transactions without banks. Transparency: All transactions recorded on a public ledger. Anonymity: No need for identity verification. Interoperability: Works across multiple blockchain applications. Low-cost & fast: Avoids interbank or international fees.

• Disintermediation: Direct peer-to-peer transactions without banks.

• Transparency: All transactions recorded on a public ledger.

• Anonymity: No need for identity verification.

• Interoperability: Works across multiple blockchain applications.

• Low-cost & fast: Avoids interbank or international fees.

• Significance: Financial Inclusion – Provides banking access to unbanked populations globally. Innovation Driver – Creates new fintech products like stablecoins, decentralised insurance, and tokenised assets. Economic Risks – Vulnerable to hacking, fraud, terror financing, and money laundering due to anonymity.

• Financial Inclusion – Provides banking access to unbanked populations globally.

• Innovation Driver – Creates new fintech products like stablecoins, decentralised insurance, and tokenised assets.

• Economic Risks – Vulnerable to hacking, fraud, terror financing, and money laundering due to anonymity.