Decentralized Finance: Everything You Need to Know About DeFi

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DeFi (pronounced dee-fy) is short for decentralized finance. It’s an emerging field that lets participants cut out the middleman and make financial transactions directly with others, and it’s quickly gaining in popularity as an alternative to traditional financial services. 

What is DeFi? 

DeFi refers to decentralized financial services on blockchains as opposed to “centralized” financial services provided through banks or other traditional financial institutions. It lets participants use cryptocurrency to provide most services that traditional banks offer with government-issued fiat currencies,lend, borrow, earn interest, trade assets, buy insurance, and more. 

DeFi services tend to be faster, cheaper, and simpler, with new advantages and services being offered each day. 

DeFi vs. Centralized finance

• Centralized finance is the default financial environment in which the world currently operates, with payments, loans, and trading activity passing through third parties and middlemen that are heavily supervised by local regulators. 

• Decentralized finance, on the other hand, delivers a whole host of advantages by enabling people to transact through financial applications via a blockchain network, cutting out intermediaries, such as traditional banking groups.

• Eliminating middlemen naturally cuts costs and speeds things up, but DeFi also makes financial services much more accessible. In the world of centralized finance, not everyone is allowed to open a bank account or given access to specific financial services. 

• DeFi therefore has the potential to financially empower billions of people around the world who are currently denied access to banking services.DeFi also has the advantage of providing more flexibility, for instance with trading hours not being limited the way they are with centralized finance.

How does DeFi work? 

DeFi uses smart contracts that don’t require traditional financial institutions to act as guarantors for transactions participants in the decentralized finance ecosystem instead transact with each other directly, and transactions are secured through blockchain technology. Most DeFi products don’t take custody of your funds, allowing you to remain in control of your assets.

Using DeFi, you access your funds or assets using a secure digital wallet. When you want to transact, you can initiate transactions through smart contracts, which means you and the other party agree to a number of specific conditions. For instance, a smart contract can be created to send funds to a particular account on a regular basis, and this will continue provided enough funds are available. Once a smart contract is set up, it cannot be altered, so funds can’t be rerouted and sent to a different account. 

Most DeFi applications are built on the Ethereum blockchain platform, though other platforms, like Cardano, Binance, or Solana, are quickly developing similar applications as well. DeFi is still in its infancy compared to centralized finance systems, so new applications are being released all the time.

DeFi applications on Ethereum

As a blockchain platform that supports decentralized apps (dApps) and smart contracts, Ethereum is naturally suited to DeFi. The Ethereum blockchain maintains the transaction history and status of accounts while Ether and other cryptocurrencies are used as assets. 

Smart contracts are in-turn used by decentralized applications, giving way to new innovative smart contracts. As DeFi is an open-source movement, its protocols and applications are widely accessible.

Ethereum is known for its flexibility, enabling developers to build dApps with ease. This flexibility means there’s already a DeFi solution for most financial services, with the ongoing possibility of creating new, innovative financial products. Since so many DeFi applications are built on the Ethereum platform, many of these products can work together seamlessly.

Conclusion

DeFi is changing how people access and use financial services. It removes the need for banks and other middlemen by using blockchain technology and smart contracts. This makes financial transactions faster, cheaper, and more accessible to everyone.

With DeFi, anyone with an internet connection and a digital wallet can borrow, lend, trade, and earn interest without needing permission from a traditional bank. It also gives people more control over their money.

Although DeFi is still growing, it has the potential to bring financial freedom to millions of people around the world. As more developers create new DeFi apps, the future of finance could become more open and fair for all.

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