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.
- Origin:
- 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.
- 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.
- 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.
- 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.
