3 minutes to understand DeFi, Decentralized Finance
DeFi is a recent term that is frequently encountered when it comes to crypto-currencies and blockchains. As a reminder, crypto-currency is a digital currency — not having a physical existence but being purely virtual — decentralized not depending on a specific financial organization like the Central Bank. As for blockchain, it is a technology that allows for simultaneous, secure, transparent storage and transmission of data without the intervention of a central control body.
Decentralized Finance (DeFi) — The nature of financial management in the twenty-first century
What is DeFi in all this? How does it work and what is its purpose?
Coindesk explain; What Is DeFi? — Decentralized finance (DeFi) applications aim to cut out the middlemen of our everyday finances.
CNBS explain Defi: People have been participating without understanding the risks’: Here’s what to know about cryptocurrency-based DeFi
Definition of DeFi Crypto
DeFi is short for “Decentralized Finance which literally means decentralized finance. In other words, DeFi is a group of financial services that operate in a decentralized manner, i.e. based on public blockchains. Note that the most used blockchain today is called Ethereum.
DeFi offers traditional banking services, such as the ability to take out loans, buy insurance or save and earn interest. What differentiates this system from traditional banking services is in the steps that are:
- Much faster, even instantaneous.
- Simplified without the need for paperwork of any kind.
- Without intermediaries such as bank advisors.
- Less expensive with lower fees.
How does DeFi Crypto work?
The principle of operation of Defi is quite simple and complex at the same time. The system uses crypto-currencies, smart contracts and DApps. Knowing that crypto currencies are the main currency for transactions in DeFi.
Smart contracts are actions that are automatically executed when certain conditions are met. This technology eliminates intermediaries in transactions. To coordinate the operation of the system, DeFi also uses DApps or decentralized applications that are based on the blockchain. One of the most frequently used DApps is the digital wallet in which crypto currencies are stored after transactions.
Decentralized Finance (Defi) Applications and Use Cases
What is the purpose of the DeFi crypto currency?
DeFi has a multitude of possible uses. Here are some uses that are limited to the financial services field:
- Obtaining a loan: if you need financial resources, DeFi allows you to obtain them easily and quickly without going through the traditional bank.
- Making savings: thanks to DeFi, you can save your crypto currencies to get regular interest and grow your investment.
- Trading crypto assets: it is also possible to buy, sell and trade your crypto currencies from peer to peer without going through intermediaries.
Decentralized Finance (DeFi): New Customers and New Services
Who uses Decentralized Finance and why?
As you can see, DeFi is aimed at both individuals and businesses. It is useful for anyone who is considering using financial services in a decentralized way and does not distinguish between users. Moreover, the objective of this technology is to progressively replace the current financial system which can be complex, slow and too restrictive.
Conclusion: let’s summarize the DeFi!
To recap, DeFi is a modernized version of the banking and financial system as we know it today. This ecosystem is still young and will evolve to become more perfect over time. Within a few years, it is likely that decentralized finance will make fiat currency transactions obsolete.
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