[A journey through the basics of Decentralized Finance.]
Are you new to DeFi and don’t know where exactly to start? Or maybe you want to up your game and take your DeFi knowledge to the next level. No matter where you are in your DeFi journey, this guide is for you.
In this article and other articles after it, we will properly break down everything about DeFi in the simplest form for you.
Let’s start by understanding Decentralized Finance [DeFi]
To really understand decentralized finance, how it works, and why it is important; it would be great to know how Decentralized Finance differs from Centralized Finance [CeFi].
What is Centralized Finance?
Before the introduction of DeFi, centralized finance was originally the standard for crypto trading as it occupied a stronghold over the crypto industry. With centralized Finance [CeFi], money and digital assets are held by banks and financial systems that aid money movement with charge fees between different parties.
In crypto, all trade and exchanges are handled through a central exchange, and funds are managed by specific personnel overseeing activities on the central exchange. It generally means that you don’t own a private key that provides you access to your wallet.
What is Decentralized Finance [DeFi]
Decentralized finance uses technology that terminates the use of intermediaries, allowing traders or businesses to conduct financial transactions through emerging technologies. DeFi can generally be described as an umbrella term for financial applications built on blockchain technology with the use of smart contracts which enables digital transactions between multiple parties.
DeFi broadly consists of applications and peer-to-peer protocols developed on decentralized blockchain networks enabling easy lending, borrowing, or trading of financial tools. DeFi aims to build an open-source, permissionless, and transparent financial service ecosystem that is not governed by any central authority and allows users full access to their assets.
Features of Centralized Finance (CeFi)
- Centralized Exchange (CEX): Although funds are basically stored on the exchange, they are kept off users’ custody and are vulnerable to threats in case of security measures. centralized exchanges have been the target of various security attacks.
- Fiat Conversion Flexibility: Centralized financial services tend to offer a lot more flexibility than decentralized services when turning fiat to cryptocurrency and vice versa.
- Cross-chain services: Centralized financial services support the trading of LTC, XRP, BTC, and many other coins issues on different blockchain platforms.
Features of Decentralized Finance (DeFi)
- Permissionless: There are no requirements or need to complete a KYC to access the DeFi services. You can directly access the services using a wallet or providing personal information or depositing money with DeFi.
- Trustless: The most significant benefit of using DeFi services is that you don’t need to trust that the service will perform as promoted. It is transparent and everyone involved can view the transactions happening on the application network.
- Quick Innovation: One of the greatest advantages of DeFi is its quick rate of innovation. Decentralized finance is still in the beginning stages of its evolution, constantly building and experimenting with new capabilities.
Conclusion
Both Decentralized Finance and Centralized Finance aim to achieve similar goals. They plan to make crypto trading popular and improve the trading volume. However, the way these two ecosystems carry out their objectives is different.
For the first time in history, a global financial system for a worldwide population is being shaped by that very population. Everyone can take part in the governance of DeFi protocols and get a seat at the table where the world of decentralized finance is actively created.
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