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DeFi, or Decentralised finance, uses blockchains like Bitcoin and Ethereum to create decentralised financial products. In this article, you will learn what decentralised finance is and how it works. We’ll also talk about some of the advantages that come with using decentralised finance and a few examples of specific ways how people use DeFi to solve real-world problems.
What is DeFi? Crypto revolutionizing finance
DeFi is short for decentralised finance. Decentralised finance describes the various financial applications and protocols that have sprung up on Ethereum and other blockchains. They work peer-to-peer, so unlike traditional finance, there are no intermediaries dripping value from the system. DeFi accomplishes this by using smart contracts, a deterministic software code that you can use to build anything from a simple payment channel to complex financial applications that mirror real-world financial instruments.
DeFi is open source and works in a permissionless and transparent way without a central authority. Because of this, DeFi aspires to replace the current financial system, which is seen as inefficient and unfair.
What are the use cases of DeFi?
DeFi grew incredibly fast in 2020 because it has such a wide range of use cases. A lot of things that exist in traditional finance can be replicated in a decentralised way. Naturally, this has attracted a lot of investors and speculators, which is why DeFi has become the most popular growth sector in the blockchain industry. A couple of the most common DeFi use cases include:
Lending protocols
With lending protocols, you can lend funds in cryptocurrencies, just as you would from a bank in the real world. Moreover, you can be the bank yourself by providing your assets to other people and earn interest on that. This is a massive improvement on the current system, which only allows you to take out loans and only under the bank’s conditions.
Stablecoins
Stablecoins are crypto versions of fiat currencies like dollars or euros. They are pegged in value and can always be exchanged for 1$.
Decentralised exchanges (Dexes)
With decentralised exchanges, users can trade cryptocurrencies without a custodian but directly from their own wallets.
Insurances
In DeFi you can also insure your funds against hacker attacks or faulty applications. In return for a premium on the investment, these funds provide the same service that a traditional insurance company would.
What are the advantages of DeFi?
If you ask “what is DeFi?” crypto advocates will tell you it’s the solution to all of the problems the traditional financial sector currently has. DeFi is decentralised and cannot be closed down or simply taken off the internet. It is also permissionless, meaning anyone is free to participate. That also includes adding to the existing infrastructure. Because of that, governments cannot censor it or ask companies to reveal customer data. At the same data, all transactions are transparent because the blockchains registering them are public, so you can follow where big money is flowing to.
Conclusion
Hopefully, you received a good answer to your question, “what is DeFi?”. Many crypto trading platforms started offering new DeFi coins in 2020. As they’ve often shown explosive growth, it’s worth checking them out.
