What is DeFi? DeFi explained
With the advent of the revolutionary blockchain technology and the projects it’s represented, the whole financial, gaming and real-world like technologies has changed. The purpose that blockchain follows is more transparency in peer-to-peer transactions by eliminating the middlemen like banks or financial institutions. Likewise, DeFi or decentralized finance with transparency, more secure, faster transactions and omitting the third party has become more popular than the conventional ways. So with all said, What does DeFi really mean? We will find out soon.
What is DeFi?
All conventional financial systems are centralized. It means that money is distributed and controlled by a central power. To be more exact, every transaction is happening under the supervision of these organs which are controlled by the government.
This centralized approach would help the interferers to tamper the data or data loss is a possibility. But DeFi has offered a decentralized way of financial approach that all the data is distributed among all the members of the network so every single person would have a record of the transactions so manipulating the data would be so complicated even impossible! More transparency and security beside faster transactions is what has made DeFi so in-demand.
Cryptocurrencies play a great role in DeFi but it’s necessary to know that cryptos are not only used to have transactions but they can be used for loans, insurance, fundraising, bonds and more importantly NFTs. At first, DeFi showed up as “Open Finance” which later changed to DeFi.
Ethereum Role in DeFi
Most of the apps are atop Ethereum blockchain. Ethereum is the first blockchain providing DeFi services. With a lot of blockchains providing similar services like Polygon, EOS and Tron, Ethereum is still the leader of DeFi.
With the smart contracts written to the Ethereum core, it’s easily hosting thousands of projects. Ethereum 2.0 is the upgrade bringing more scalability and faster transactions.
Decentralized Exchange or DEX
With all mentioned above, there would be a place needed to trade cryptocurrencies safely. So here comes DEX which is a decentralized exchange which provides blockchain services like exchanging fiats like dollar to cryptos.
One of the intriguing features of DeFi, is the coin that has a fixed price. These coins are called Stablecoin; the fluctuation in the market does not matter, they always would have a fixed price like tether -which is the most famous one- that is always 1 dollar.
Lend and Borrow
Like the old conventional financial system, there would be a chance to get a loan by putting up a collateral. For instance, you can put a special amount of crypto or stablecoins in general and get a loan for a specific purpose. The difference is that there’s no bank or financial institutes involved and everything happens in a peer-to-peer process.
This feature in DeFi provides a condition in which by investing or staking your crypto you would be able to earn passive interest during the time your asset is blocked. That’s why DeFi is so popular!
Distinguishing systems each blockchain such as Bitcoin, Ethereum, Polkadot and Solana has, it is impossible to transfer a coin from a network to the other one. There would come wrapped coins which would help to transfer values between different chains.
DeFi has offered a lot of great services which has made financial transactions more secure and faster. By eliminating the third party and making a peer-to-peer process, The world of blockchain is becoming more and more popular.