Decentralized finance is the catchy word that represents a powerful element in the universe of a blockchain.
If you’re a beginner in the cryptocurrency world, you might have heard about decentralized finance many times. If you’re unaware of what is decentralized finance or DeFi, this article will be helpful for you.
Decentralized finance stood unique in the crowd. As it is offering financial services by eliminating the intermediaries. Neither bank nor broker is required to process the financial services. Users can save time, money, effort and a lot.
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What is DeFi crypto?
DeFi is well-known as decentralized finance. DeFi is an umbrella word for the financial services that happen on the public blockchain, especially for Ethereum. Investors are happy with the invention of decentralized finance. As they don’t need to rely on intermediaries such as banks. With decentralized finance, people can get the financial services they need. It includes earning interest, borrowing money, lending assets, trading assets, purchasing insurance and more. With DeFi, all these things can be done faster and there is no need for paperwork.
Decentralized finance is associated with the blockchain. With decentralized and immutable features, every computer on the network will store a copy of the transaction history. It means, no individual entity will have complete control over it, they cannot modify or alter the transaction history.
As mentioned earlier, financial services such as earn, borrow, lend and trade that can be identified as the DeFi (decentralized finance) can be discovered on Ethereum. Yes, you’ve heard it right. Ethereum is the second-largest digital asset in the crypto marketplace. DeFi acts as the place that enables other blockchain applications to be created on it. Here, ETHER is used as the payment.
Keeping it simple, with decentralized applications, users can earn, lend, trade, exchange and perform other financial operations using smart contracts and blockchain technology. No intermediary or middleman is involved. This way, users can reduce the cost. DeFi is an excellent digital marketing platform.
DeFi Currency
Decentralized finance is specially designed to utilize cryptocurrency or digital assets for transactions. Decentralized finance technology is under development, so it could be a daunting task to define exactly how these existing cryptocurrencies are implemented. Stablecoin is a revolutionary concept, a crypto will be pegged to existing fiat currency such as the dollar.
What are the key benefits of DeFi?
Let’s have a look at the advantages of decentralized finance.
Open – This is the popular benefit of DeFi. User’s don’t require to create or open an account. They usually create a wallet and access it. That’s it!
Pseudonymous – User’s don’t need to enter their personal information. It includes name, email address, phone number, address and more.
Flexible – DeFi offers immense flexibility for its users. They can easily move their digital assets irrespective of time and place. No need to seek permission from central authority or wait for longer transactions to complete. On the other hand, DeFi is cost-effective.
Speed – Everything is processed quickly. Right from rewards to interest rates, all the information is quickly updated. Within 15 seconds, the records get updated. When compared to traditional banks, the transaction speed and updates are done quickly.
Transparent – Nothing is hidden! Everyone on the network is involved, they can view complete transaction history. Only authorized user’s on the network can view the data.
DApps – With decentralized finance applications, users will have complete control over their assets or money. They can trade according to their choice.
How does DeFi work?
Now, let’s discuss how decentralized finance works.
Decentralized finance uses smart contracts and cryptocurrencies to provide a wide range of financial services to avoid intermediaries. With DeFi, intermediaries are eliminated. The financial service can be lending, earning interest, buying stocks and more.
- Lending – Users or investors can lend their cryptocurrencies or digital assets and earn maximum interest on them.
- Get an instant loan – Receive a loan without any broker involvement.
- Buying derivatives – Purchasing stocks is simple and easy through decentralized finance.
To enable peer-to-peer transactions, investors can utilize decentralised applications, most of which are discovered on the Ethereum (ETH) network. The popular Decentralized finance services that use smart contracts are as follows
- Coins
- Stablecoins
- Tokens
- Digital wallets
- Staking
- Trading
- Borrowing
- Yield farming
Decentralized finance is an open-source platform. It means users or developers have an opportunity to build their own Decentralized Applications.
How do you earn money using DeFi?
Generally, people are earning money using decentralized finance. But how?
There are multiple ways that people are using decentralized finance to maximize their savings. The popular way is to generate money through Ethereum-based lending applications. Users lend their money and earn interest. Yield farming is another money-making strategy. But, when compared to other approaches, yield farming can be risky. This is often used by advanced traders. Investors can expect larger returns through yield farming.
Conclusion
The ultimate goal of decentralized finance is to eliminate the intermediaries by enabling users of companies to perform financial activities through blockchain technology. This can be done through a peer-to-peer network that probably uses software, hardware, connectivity, security protocols and more. Whether you reside in the US or UK, with internet connectivity, users can earn, trade, borrow and lend using the software, it will record everything. Also, they verify the transactional activities in the distributed database. Decentralized finance uses emerging technologies to avoid centralized finance standards. It means anyone can use the financial service at any time.
