Decentralized finance, or DeFi, is similar to but not identical to Bitcoin and other cryptocurrencies. The word DeFi refers to financial systems enabled by decentralized blockchain technology. DeFi is directly linked to the Ethereum network and the coins based on it.
DeFi technology generates decentralized money, removing the need for government-controlled central banks to produce and manage currency. However, DeFi technology is capable of providing a wide range of alternative blockchain-based financial services applications. Fintech businesses use DeFi technology to provide savings accounts and loans, as well as securities trading and insurance.
Literally anyone with an internet connection has access to this financial product and anyone can begin their journey with decentralized finance at the drop of a hat! But first, let’s look at DeFi Defined.
What Makes it So Important?
DeFi builds on the fundamental concept of Bitcoin — digital money — to develop a full digital alternative to Wall Street without the associated expenses. This has the potential to create more open, free, and equitable financial systems accessible to anybody with an internet connection.
It will definitely change the way we look at financial markets.
How Does it Work?
Users commonly interact with DeFi through software known as dapps (“decentralized apps”), the majority of which are now running on the Ethereum blockchain. Unlike a traditional bank, there is no application or account to start.
Here are some of the current ways users are interacting with DeFi:
- Lending: Lend your cryptocurrency and earn interest and prizes every minute, not just once a month.
- Obtaining a loan: Get a loan instantaneously without having to fill out paperwork, including extremely short-term “flash loans” that traditional financial institutions do not provide.
- Trading: Make peer-to-peer trades of specific crypto assets, just like you could buy and sell securities without a broker.
- Saving for the future: Invest some of your cryptocurrency in savings account alternatives to earn higher interest rates than you would normally receive from a bank.
- Purchasing derivatives: Place long or short wagers on certain assets. Consider them to be the cryptocurrency equivalent of stock options or futures contracts.
The Pros
You are not required to apply for anything or “open” an account. You just gain access by creating a wallet. You do not need to submit your name, email address, or any other personal information. You can shift your assets anywhere, at any time, without obtaining permission, waiting for lengthy transfers to complete, or paying heavy transaction fees.
Interest rates and prizes are frequently updated (as frequently as every 15 seconds) and can be much greater than standard Wall Street. All parties involved can observe the entire set of transactions (private corporations rarely grant that kind of transparency)
The Cons
Active trading on the Ethereum blockchain might become costly due to fluctuating transaction rates. Because this is a new technology, your investment may experience considerable volatility depending on which dapps you use and how you use them. You must keep your own records for tax purposes. Regulations can differ from one place to the next.
What Does it Do?
The goal of DeFi is to raise concerns about the usage of centralized financial institutions and third parties in all financial activities.
Centralized finance does have its benefits, but it does come with limitations. Things like credit scores are necessary when working with these finance applications, but now the future of finance is going toward the decentralized route.
Is Bitcoin Considered DeFi?
Bitcoin is a type of cryptocurrency. DeFi is built to leverage cryptocurrencies in its ecosystem, therefore Bitcoin isn’t so much DeFi as it is a component of it.
What’s The Value of DeFi?
Total value locked (TVL) is the total value of all cryptocurrencies staked, borrowed, put in a pool, or utilized for other financial purposes across DeFi. It can also reflect the total value of specific cryptocurrencies used for financial transactions, such as ether or bitcoin.
The Next Level of Finance
Decentralized finance (DeFi) is a new financial technology that is challenging the current centralized banking system. DeFi reduces the costs that banks and other financial institutions charge for utilizing their services and encourages the usage of peer-to-peer, or P2P, transactions.
Blockchain technologies, digital assets, cryptocurrency trading, all made possible through decentralized financial services. Many crypto investors wouldn’t be where they are today, if it wasn’t for the birth of this technology!
The history of transactions goes back to the stone age, where we traded animal skins for food. Now, we have credit cards, cryptocurrency assets, and blockchain transactions where it all exists on a screen. It looks like digital finance is here to stay.
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