What is DeFi?

DeFi (or “decentralized finance”) refers to financial services provided on public blockchains, especially Ethereum. DeFi allows you to do most of the same things that banks do — earn interest, borrow, lend, purchase insurance, trade derivatives, exchange assets, and so on — but it’s faster and doesn’t involve paperwork or a third party. DeFi, like crypto in general, is worldwide, peer-to-peer (meaning it is sent directly between two people rather than being routed through a centralized system), pseudonymous, and open to everybody.

What DeFi started with…

In many respects, Bitcoin was the first DeFi application. Bitcoin allows you to truly own and manage wealth and send it anywhere in the globe. It accomplishes this by allowing many people who do not trust one another to agree on a ledger of accounts without the necessity for a trusted middleman. Anyone can use Bitcoin, and no one has the right to change its rules. The rules of Bitcoin, such as its scarcity and openness, are inscribed into the technology. It’s not like traditional finance, where governments may issue money, depreciating your funds, and firms can close down marketplaces.

Ethereum is based on this. The rules, like Bitcoin, cannot be changed without your knowledge, and everyone has access. However, it also makes this digital money programmable through smart contracts, allowing you to go beyond simply holding and sending value.

DeFi vs traditional finance

Understanding the difficulties that exist today is one of the best ways to see the potential of Defi.

1. Some people aren’t granted access to set up a bank account or use financial services.
2. People who do not have access to financial services may find it challenging to get work.
3. Financial assistance can block you from getting paid.
4. Your data is a hidden cost of financial services.
5. Governments and centralised institutions can shut down markets whenever they want.
6. Trading hours are frequently restricted to business hours in a specific time zone.
7. Money transfers can take days due to internal human processes.
8. There’s a premium to financial services because intermediary institutions need their cut.

Why is DeFi important?

DeFi expands on Bitcoin’s basic principle – digital money — to provide a comprehensive digital alternative to Wall Street, but without all of the related fees (think office towers, trading floors, banker salaries). This has the potential to build more open, free, and fair financial markets that anybody with an internet connection may access.

What are the benefits of DeFi?

Open: You are not required to apply for anything or “open” an account. You gain access by creating a wallet.

Pseudonymous: You do not need to enter your name, email address, or other personal information.

Flexible: You can relocate your assets anywhere, at any time, without obtaining permission, waiting for lengthy transfers to complete, or paying exorbitant costs.

Fast: Interest rates and prices are frequently updated (as often as every 15 seconds) and much more significant than traditional Wall Street.

Transparent: All parties involved can observe the entire set of transactions (private corporations rarely grant that kind of transparency)

How does DeFi work?

Users commonly interact with DeFi through software known as dApps (“decentralised apps”), the majority of which are now running on the Ethereum blockchain. In contrast to a traditional bank, there is no application to complete or account to open.

Here are some of the current ways users are interacting with DeFi:

Lending: Lend your cryptocurrency and earn interest and prizes every minute, not just once a month.

Obtaining a loan: Get a loan instantaneously without having to fill out paperwork, including extremely short-term “flash loans” that traditional financial institutions do not provide.

Trading: Conduct peer-to-peer trades of specific crypto assets, much as you would if you were buying and selling stocks without the use of a brokerage.

Saving for the future: Invest some of your cryptocurrency in savings account alternatives to earn higher interest rates than you usually receive from a bank.

Buying derivatives: Purchasing derivatives entails making long or short wagers on specific assets. Consider them to be the crypto equivalent.

What are the downsides?

Due to fluctuating transaction rates, active trading on the Ethereum blockchain might become costly.

Your investment may see considerable volatility depending on which dApps you use and how you use them — this is, after all, new technology.

For tax purposes, you must keep your records. Regulations can differ from one place to the next.

Also Read:

What is Cryptocurrency, and how does it work?

What are NFTs, Beginners Guide 2022