DeFi is one of the newest financial technologies, built on distributive ledgers similar to cryptocurrency. This system eliminates third parties, such as the banks and institutions that hold the control over your finances.
To understand decentralised finance, you first have to acknowledge the difference between centralised and decentralised finance.
In centralised finance, your money is located in a bank, whose main purpose is to earn money from your funds. Each "link" in this chain receives a percentage of the commission for the service provided. Decentralised finance eliminates the need for third-party intermediaries by allowing entrepreneurs to conduct transactions using peer-to-peer financial networks that use special encryption methods and security protocols. The most important condition for working with DeFi is the availability of the internet. A user from anywhere in the world, connected to the internet, can transfer or receive funds using software that verifies transactions against a financial database, using a consensus mechanism to verify them.
Much of the DeFi concept revolves around a stablecoin, a cryptocurrency backed by an organisation or pegged to a fiat currency, such as the dollar.
Howdoes DeFi work?
Decentralised finance uses blockchain technology. Blockchain is a special distributed and secure database or registry. You can find more information on blockchain here. Information about the transaction is recorded in the block; when verified by other users, it is encrypted, and the block is closed. Each new block has information about the previous block, which eliminates the chance of changing or deleting it.
Let's analyse the advantages of DeFi in comparison with traditional financial structure. Unlike traditional financial services, such as a bank, DeFi has significant advantages:
- You hold your own assets. Only you hold your assets.
- Funds arrive in a matter of minutes, unlike a bank transfer.
- Some may have trouble opening a traditional account, but DeFi is open to everyone!
- With DeFi you don't need to provide personal data, and can maintain anonymity in transactions.
- The market is always open - 24/7. No intermediaries means no breaks.
What can you do with DeFi?
- Trade tokens trading.
- Own and manage your personal portfolio.
- Send assets from anywhere in the world, globally.
- Loan money in a peer-to-peer or pool-based format.
What is the future of DeFi?
DeFi is rapidly evolving and expanding, reflecting the traditional financial services ecosystem. This new technology could eventually impact centralised finance as DeFi is a faster, simpler, and cheaper alternative.
