Trakti Smart "Legal" Contracts Blog

What is DEFI and why it is important for companies to apply it in contracts

on November 2, 2022

The acronym “DeFi” stands for decentralized finance. Think of it as an umbrella term for a whole huge financial infrastructure that focuses on and empowers decentralization. DeFi is closely related to cryptocurrencies or rather – the blockchain technology that underpins them. As such, it is important to understand what is DEFI and why it is important for companies to apply it in contracts.  

Definition of DeFi  

Being decentralized means that contracts can function without a middleman. When it comes to financial transactions and supply chains, that middleman can be anything or anyone – a bank, an individual acting as an escrow, a developer who has written code for the application that you’re using, and so on. 

Following that train of thought, the main benefit of DeFi is the fact that it allows for trustless financial processes to take place within its ecosystem. For companies that deal with multiple vendors or suppliers, this could mean thousands of dollars in savings. When you think about what is DEFI and why it is important for companies to apply it in contracts, think of it in the context of optimization of existing processes and operations. 

Smart contract and token usage 

We have talked about smart contracts in the past. A smart contract is an agreement that has been coded into the blockchain. The main advantage of smart contracts is that they are practically impossible to breach – once a contract is submitted to the blockchain, there’s no turning back, and no way to reverse it or change its settings. 

Smart contracts are the gateway into DeFi applications as they are completely trustless, and do not have any third-party interference. 

More and more organizations are harnessing the power of the open-source financial ecosystem to solve problems and create new opportunities. 
 

Benefits of DeFi 

One of the biggest trends in the DeFi sector is the emergence of cross-chain technology, which allows users to carry out transactions across multiple blockchains. This is a bandwidth solution that can be used to distribute the burden of demand. Other trends that are gaining momentum include the automated market-making capabilities of Uniswap, the ability to manage assets on YFI, and the faster transactions on Aave. 

The rapid emergence and evolution of the DeFi movement have taken it beyond its traditional role as a speculative trading platform. It is now taking on a more utility-based approach, with the goal of making it easier for users to exchange fiat money for cryptocurrency. The success of the movement will depend on the various factors that affect its utility, such as transaction fees, speed, and systems. 

As the world experiences new challenges, players in the financial industry continue to develop new ideas. With the support of strong momentum, DeFi is well-positioned to transform the traditional paradigm by helping companies manage their assets, including — buying, selling, and transferring digital assets. 

Transparency and decentralization are paving the way to discover and analyse an unprecedented amount of data. With faster access to data, businesses can make well-informed business decisions, discover new financial opportunities, and adopt better risk management tactics. 

Get your company DeFi-ready with Trakti’s automation tools.  

To better understand the definitions related to the use of Smart legal contracts and the Trakti platform, download now your copy of the Trakti Smart Legal Contract Glossary: https://trakti.com/smart-contract-glossary/

To find out more about Trakti, go to: https://www.trakti.com/why-trakti-en/

Sarah GiannelliWhat is DEFI and why it is important for companies to apply it in contracts