Most people know cryptocurrency as virtual money. But more than just a store value or a means of exchange, one of the ultimate goals of blockchain technology and everything that comes with it is disruption through decentralization. DeFi is one of the most notable real-world applications of blockchain technology. What is DeFi and how does it work? Read on to find out.
What Is Decentralized Finance (DeFi)?
DeFi is the short form of “decentralized finance”. This is an umbrella term used to describe various financial applications built on blockchain technology aimed at disrupting the status quo of financial intermediaries in financial services.
Understanding Decentralized Finance (DeFi)
Decentralized finance refers to financial services built on the public blockchain. With DeFi, you’re basically doing everything that banks and other conventional financial service providers support but without relying on a third party or the long and stressful paperwork involved. DeFi is financial services free from a centralized system. Instead, it is open to all and pseudonymous. To fully grasp what DeFi is, you must understand the differences between centralized and decentralized finance.
Centralized finance
This refers to conventional financial services run by banks, corporations, and other third parties that facilitate various financial services such as banking, insurance, loans, betting, and other financial transactions.
Decentralized finance
The ultimate goal of decentralized finance is to get rid of middlemen in financial transactions and provide access to all. It is a peer-to-peer financial network built on advanced security protocols and applications. DeFi makes it possible for anyone to lend, borrow money, trade and carry out other financial transactions on distributed financial databases free from the control of third parties.
How Does DeFi Work?
Decentralized finance takes its root same blockchain technology that powers various cryptocurrencies. However, the Ethereum blockchain is most popularly associated with decentralized finance because of how easy it makes it to create and run decentralized apps.
Decentralized finance products
These are decentralized apps built on the Ethereum blockchain that facilitate peer-to-peer financial transactions. These apps use advanced software protocols that make it possible for two parties to exchange goods or services without involving a third party. There are various types of DeFi products that cut out third parties from legacy financial services such as banking, loans, derivatives, crowdfunding, betting, and so on.
DeFi Currency
Decentralized finance platforms still need cryptocurrencies or Defi tokens for transactions. Most apps make use of stablecoin, a type of cryptocurrency with its value pegged to a fiat currency.
The Future of DeFi
The world of Decentralized finance is still emerging and riddled with a lot of uncertainties right now. The fact that it is an unregulated financial ecosystem still makes it prone to infrastructural mishaps and even scams. There are also growing concerns about energy implications, carbon footprint, and overall stability for the system. As DeFi continues to grow, conventional financial institutions that it will replace in the future either push back or find a way to integrate themself into the system if they’ll remain relevant.
What Does Decentralized Finance Do?
The main idea of Decentralized Finance is to eliminate third parties and facilitate peer-to-peer interactions for all financial transactions.
Is Bitcoin a Decentralized Finance?
Decentralized Finance platforms make use of Cryptocurrency. Since Bitcoin is a cryptocurrency, it is only a part of the Decentralized Finance ecosystem and not DeFi in itself.