What is Decentralized Finance? Meaning and benefits
Defi, or decentralized finance, is a sector of the crypto industry that seems to be getting more into the limelight.
Many people seem to believe in this sector of the crypto industry, although it has done some serious damage in the past few years.
Decentralized finance introduces decentralization into the management of our finances.
In simple terms, there can be no restrictions put on our money either by the government or the bank.
Before you can understand what decentralized finance is all about, you need to know about centralized finance (Cefi).
Centralized Finance vs Decentralized Finance
Centralized finance, sometimes called traditional finance, is where money is held and controlled by centralized authorities like banks and governments.
In centralized finance, these authorities help govern and secure the way money moves in the system.
Decentralized finance, on the other hand, wants to get rid of these centralized authorities, thereby giving power to the holders of these currencies.
What is Decentralized Finance (Defi)?
Decentralized finance is a new technology backed by blockchain technology that eliminates the middleman when transactions are made.
This technology helps users make transactions without the need for an intermediary (e.g., a bank), thereby eliminating restrictions on financial services.
Users only need a device and an internet connection to use this technology.
How does Defi work?
Decentralized finance makes use of dapps. Decentralized applications, or dapps, are apps that facilitate financial services like investing, borrowing, lending, etc.
They run on blockchain technology and are built using smart contracts.
Smart contracts are contracts that execute instructions by themselves when certain conditions set by two or more parties are met. Smart contracts are a replacement for intermediaries in centralized finance.
Smart contracts are instructions that consist of codes. In Defi, codes are the law.
A smart contract’s code is publicly visible to the public. Anyone has the power to audit it.
This prevents any exploitation and promotes transparency.
Benefits of using defi
In Defi, there are some benefits to it. We are going to take a look at some of them.
- Accessibility
In Defi, you have access to any financial service as long as you have a device and an internet connection. There is no restriction whatsoever.
You can also access Defi’s services from any part of the world.
- Privacy
Defi ensures that its users are either anonymous or pseudonymous.
You can access Defi without having to give up your personal information.
- Stability
You have access to stable currencies in Defi. These currencies peg their value to fiat currencies or an asset.
Most stable currencies peg their value to US dollars.
- Security and transparency
Defi has strong security since it uses blockchain technology.
Using the blockchain technology allows the public to view and verify any transaction.
Pros and Cons of Defi
Pros
- It is decentralized — no central authority is involved.
- There are no restrictions on the financial services available.
- High-security measures
Cons
- The technology is not perfect since it’s new.
- A large number of scams and frauds
- Low participation because of the complexities involved.
Conclusion
Defi is a new technology that is trying to eradicate the traditional finance that has been around for years.
Although it still has a long way to go, it is promising.
If you want to learn about Defi without facing complexities down the road, make sure you follow me.
Also, drop 50 claps for me.
New to trading? Try crypto trading bots or copy trading
