Everything You Need to Know About DeFi
DeFi is the umbrella term used to describe decentralized currency, or peer-to-peer financing through public blockchains. This concept is set to disrupt financial intermediaries and change the way people transact.
While most people know about cryptocurrencies, not many know what DeFi is about. This article takes an in-depth look at DeFi, including the benefits and risks involved.
What is DeFi?
DeFi is short for “decentralized finance,” which is any financial application that falls in the blockchain framework.
DeFi takes the concept of simple transfers to more complicated financial uses. These transactions are peer-to-peer, which means it’s done directly between two people, with no middleman.
⚠️ Blockchain is the technology behind cryptocurrencies like bitcoin and ethereum. It holds public records on various decentralized servers of any transactions. This means no centralized institution controls the transactions, or, put simply, no bank controls the transactions.
Why is DeFi Important?
DeFi creates an alternative to traditional finance solutions, taking control from entities and giving it back to the people.
Centralized institutions and human gatekeepers can control the speed and sophistication of transactions, but with DeFi, the control is completely in the hands of the two parties involved in a transaction.
Key Attractions to DeFi
There are various benefits to DeFi. Some of these include:
With traditional financial options, there are considerable costs involved. DeFi is virtually cost-free, eliminating the costs involved with traditional banking services. There are no offices or salaries to pay, making it a much more viable option for many. There also are no charges for the transactions, where traditional banks often charge fees for many of their transactions.
You don’t have to fill in lengthy application forms or provide proof of identity. You can access the services simply by creating a digital wallet, which is more secure than keeping money in a bank account thanks to the use of blockchain.
While you’re not going to be completely anonymous, one of the major benefits of DeFi is that you don’t have to provide any personal details, including your name or address. You can use a “screen name” or a pseudonym to conduct your business.
You can move any of your assets at any time. There are no limits to amounts or cut-off times for transactions.
Transactions are lightning-fast, with no waiting periods. No one needs to authorize transactions, and there’s no system they need to go through. You can also expect higher interest rates than with traditional financing.
Both parties can see the entire transaction history as it appears in the blockchain. This isn’t often possible with traditional banking methods. This decreases your risk, as you know exactly what you’re in for.
How Does DeFi Work?
To participate in DeFi solutions, you need software typically called decentralized apps, or “dapps.” Most dapps are run through the Ethereum blockchain.
When engaging with DeFi, you can accomplish a number of different tasks, including:
- Lending: You can lend out your crypto to others and earn interest.
- Borrowing: You can access instant loans without the paperwork. These are incredibly fast loans, referred to as “flash loans,” which traditional banks don’t offer.
- Trading: You can swap your crypto with other users.
- Saving: You can put some crypto in savings accounts that earn higher interest.
- Buying derivatives: You can make long- or short-term bets on certain currencies, almost like the crypto version of futures contracts and stock options.
Once you’ve made a transaction, it’s captured in the block and verified by other users. Once these users agree on the transaction, the block is encrypted, and another block is created, containing information in the previous block.
DeFi vs. Fintech
FinTech is short for “financial technology,” which includes any technology in the finance industry. While there have been interesting apps and software that have come out recently, such as mobile banking, e-wallets, and shared-payment apps, there hasn’t been much change in how the finance industry works overall.
However, DeFi has completely changed the landscape, since it eliminates intermediaries and reduces the costs of financial services. Although some people say that DeFi is part of FinTech, the truth is that they are far from being the same. DeFi completely cuts out the middleman when it comes to transactions. You can remain relatively anonymous because you don’t need to provide any personal information or fill out application forms to use the dapps. Transactions are transparent, something that traditional banking does not allow.
While the future may be uncertain, DeFi is set to disrupt the way the financial industry operates.
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