Decentralized Finance (DeFi) is an emerging financial technology for organizing and enabling cryptocurrency-based transactions, exchanges, and financial services. This technology provides most of the services that traditional banks offer – lending, borrowing, receiving interest, trading assets, purchasing insurance, etc. The transfer of the average from the digital wallet is done in minutes by anyone, and only an internet connection is needed.
DeFi vs. Centralized Finance.
Centralized funding is the standard financial environment. This is where the world currently operates, with payments and trading activity passing through third parties and intermediaries that are closely supervised by local authorities. Decentralized finance enables people to transact through financial applications using a blockchain network without the presence of intermediaries. Removing intermediaries reduces costs and speeds up the process. In the world of centralized finance, not everyone can open a bank account or access certain financial services. On the other hand, DeFi has the potential to provide financial opportunities to billions of people around the world who are deprived of access to banking services.DeFi also has the advantage of providing greater flexibility, for example in that trading hours are not limited as they are in centralized finance.
Pros and cons of DeFi.
Cryptocurrencies seem to be an attractive investment. Every investment involves a certain level of risk. DeFi is no less risky. Familiarize yourself with the advantages and disadvantages in more detail before deciding to invest. A good rule of thumb is not to invest money that you cannot afford to lose.
| Pros | Cons |
|---|---|
| Without intermediary between transactions | Оffer higher interest rates |
| Аllows for permissionless and trustless | High volatility and risk |
| Provides financial services to the unbanked. | Lack of consumer protections |
How does DeFi work?
DeFi uses smart contracts that do not require you to act as a guarantor as with traditional financial institutions. Instead, participants in the decentralized financial ecosystem transact directly with each other, and transactions are secured using blockchain technology. Before being stored, each transaction is validated by other users who are addressed as validators. The interesting thing here is that you can create a contract that sends funds to a specific account while you deposit cash into it. A smart contract that targets a specific account prevents funds from being diverted. Through the secure digital wallet, you can access your funds or assets. Most applications like DeFi are built on the Ethereum blockchain platform.
