We are all aware of financial systems, without them our society and the world as we know it will come to a halt. Until now, all the financial systems we have seen are centralized, with a central authority (bank, etc.). These units will be responsible for the administration of all the transaction-related processes.
DeFi pushes us to think in the opposite direction. So, let’s understand it clearly.
What is DeFi?
It is a mechanism by which people can transfer money from one point to another without involving any central authority. But, that’s not it. People can make trading decisions and participate in activities concerning it. Although Bitcoin and Blockchain are the earliest versions, modern Defi operates on Ethereum (mostly). DeFi is an open-source platform, to begin with.
Ethereum is the best choice as it allows developers to customize it accordingly while developing DeFi tokens or currencies. Using this protocol, developers can create decentralized applications, such as dApps.
How does DeFi work?
DeFi applications run using smart contracts, a system that provides a secure way of making, sending, or receiving money. Smart contracts eradicate the concept of a middleman. Anyone with an internet connection can use these currencies. If you want to use it, you need to be familiar with the network of Ethereum.
Advantages of DeFi
No middleman: DeFi is open-source, and you don’t need any permission from anyone to use it. If you have a wallet, and a reliable internet connection, you are all set.
Transparent: Every user of the network will be able to verify transactions made by other users. All details of the transaction will be shown to them, thus ensuring transparency and security.
Programmable: Smart contracts are programmable, and it makes the creation of these applications that much easier.
Tamper-proof: No one can tamper with the data present within these smart contracts. This increases the degree of security and reliability among the users.
Complimentary: All DeFi applications are designed to complement one another. These must be incredibly flexible, and interoperable with other assets.
Ownership: The participants will have full access to these DeFi assets, and their data.
- Decentralized exchanges: Users can directly communicate with one another while trading cryptocurrencies, without turning to any intermediary.
- StableCoin: This cryptocurrency shares a relation with real-world fiat money, and it is used to detect price stability
- Decentralized lending platforms: Peer-peer, decentralized lending is possible using smart contracts.
- Wrapped Bitcoins– WBTC is wrapped in an Ethereum shell so that users of the Ethereum network can directly use it
- Market predictions- DeFi allows people to make predictions about certain events and their impact on the financial world.
It also has applications in yield farming and other subsequent fields. We need to invest in it, sure, but you need to know it has some pitfalls too. The risk of non-repayment is quite high, and there is no relationship between fiat currencies yet. There are other drawbacks too, however, developers are trying to work around them.
You can see that DeFi is the future and it will be wrong to turn away from it.