Decentralized Finance (DeFi) is the emerging concept for financing. It is taking Cryptocurrency to the next step, and here is everything you need to know about Decentralized Finance. When you learn about Cryptocurrencies too, do not forget to take a look at Bitcoin Era for more comprehensive information in this field.
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What is Decentralized Finance?
A collective term for financial services and products, DeFi is accessible to everyone who has an Internet connection. This concept theoretically eliminated the need for any centralized third party like a bank or a Government agency to approve any financial transactions.
DeFi is mainly regarded by many as a term covering the new financial services innovation wave. It is connected deeply to Blockchain, the public ledger that Bitcoin is based on. Blockchain is decentralized, immutable, transparent, and enables all of the computers on the network to hold a copy of all the transactions on the network. This is the base idea behind DeFi that no head entity has control over the ledger eliminating centralization.
Difference Between DeFi and Bitcoin
Bitcoin is a digital Cryptocurrency used as a store of value that is decentralized and operates on its public ledger called Blockchain. In contrast, DeFi, is a concept. A concept that details financial services built on public blockchains like Ethereum and Bitcoin. One example of these financial services is that users can earn interest or borrow against their Cryptocurrency cassettes. DeFi has a lot of such financial services that it is an umbrella term for borrowing, lending, trading, and its derivatives.
How Does DeFi Work?
DeFi eliminated intermediaries with the help of Smart Contracts and Cryptocurrencies. The financial services offered under DeFi are lending, trading peer-to-peer without a broker, receiving loans instantly, earning an interest rate better than the bank, saving Cryptocurrency, and purchasing derivatives like Futures contracts and stock options. These peer-to-peer trades are facilitated using dApps, mostly found on the Ethereum network. The protocols and applications are theoretically open to its users, so they can inspect and innovate upon them. So, users can inspect and innovate these protocols to create unique combinations and develop their apps.
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What are Smart Contracts?
Smart Contracts are contracts signed between two parties that run on Blockchain and are stored on a public ledger. These contracts cannot be altered and can only be closed once both parties have met their conditions. The biggest benefit of Smart Contracts is that the financial services on it can be completed without the intervention of any third party.
Uses of DeFi
Since DeFi utilizes smart contracts and Cryptocurrencies to offer financial services without any bank involvement, with the growing number of dApps, the possibilities of DeFi have no limits. Some of the popular uses of DeFi are transactions to any corner of the world, Crypto wallets for storing money, peer-to-peer lending and borrowing, trading anywhere and anytime anonymously, trading stocks, NFTs, other assets, and many other services.
This was all you needed to know about DeFi to start using this new wave of innovation in the financial market.