Everything You Need To Know About Decentralized Finance (DeFi)

Decentralized Finance or DeFi is an open and global financial system designed for the online market. It is a system used as an alternative to others that are seen as non-transparent, tightly managed, and founded on infrastructure and processes that are decades old.

DeFi has the advantage of giving users control and visibility of their funds and providing exposure to global markets. The system also gives you alternatives to local currency or banking choices.

Anyone who has an internet connection can have access to financial services with the help of DeFi financial products. In addition, these DeFi services are primarily owned and controlled by their users. Decentralized applications or DeFi applications have so far been responsible for tens of billions of dollars worth of cryptocurrency, a number that continues to grow every day.

What is DeFi?

Decentralized Finance (DeFi) is used as a collective term to refer to financial products and services that anyone in public can access, as long as they have an internet connection set up. As a result, the markets are always available. In addition, users can be assured that no centralized authorities can take advantage of their power to block payments or deny access to any service, thanks to DeFi.

Previous services are known for being slow, or risk human error are now made automatic and safer. This is primarily because the services are directly handled by code that anyone can inspect and examine closely.

There are many benefits to using DeFi as the crypto economy continues to grow worldwide, giving people more opportunities to borrow and lend crypto assets, earn through interest rates, and more. For example, Argentina residents have used Decentralized Finance (DeFi) to combat rising inflation in the region. Various companies have also started to distribute their wages to employees in real-time. There have also been cases where people have paid for loans worth millions of dollars without providing any sort of personal identification.

What are the Differences Between DeFi and Traditional Financial Services?

Knowing current issues is crucial to understand better Decentralize Finance (DeFi) and its potential benefits.

• Some people are not given access to a bank account or the use of a financial service
• There is a lack of access to a financial service that prevents users from getting employed
• Some financial services can prevent users from getting paid
• Personal data is considered a hidden charge in financial services
• Governments and centralized institutions have the power to close down markets when they want
• Trading hours are usually limited to business hours based on time zones
• Internal human processes can cause money transfers to take days
• Financial services charge a premium as payment for becoming intermediary institutions

Critical Differences Between DeFi and Traditional Financial Services

DeFi

• Users hold their money
• Users have control over where their money goes and how it is spent
• Transfer of funds only takes minutes
• Transaction activity is kept pseudonymous
• Decentralized Finance (DeFi) is available to anyone
• The market is always kept open
• The service has a high level of transparency

Traditional Financial Services

• Companies hold users' money
• Users trust companies to manage their funds
• Manual processes cause payments to take days to finish
• A user's financial activity is tightly connected with their identity
• Application is needed to use financial services
• Markets are sometimes closed temporarily due to employees needing to take breaks
• Financial institutions are considered closed books, keeping records private from users

What was the First DeFi Application?

The first-ever DeFi application is Bitcoin, which allowed users to own and control the total value of a currency and even send it anywhere in the world. The process is done by providing a means for many people who had no trust in each other to agree on a ledger of accounts without using a trusted intermediary.

Bitcoin is available to anyone, and no authority has the power to change its processes' rules. Instead, the platform's technology contains its own rules. Unlike traditional financial services, where governments can simply print out money, that risks devaluing a user's savings. Additionally, companies in traditional financial services can shut down markets on a whim.

Taking advantage of the foundation of DeFi applications, Ethereum builds its rules similar to Bitcoin, where no one can change it, and everyone in the market has access to it. Additionally, the platform makes digital money programmable with smart contracts, allowing users to do more than just store and send crypto across DeFi applications.

What is Programmable Digital Money?

While many could be asking what the benefits of programming money has, the most direct benefit it provides is security. DeFi allows users to have more control over their digital currencies, including borrowing and lending, scheduling payments, and even investing in index funds.

Benefits of Some Decentralized Finance (DeFi)

Quickly Send Money Worldwide

One key benefit of DeFi is the ability of a user to send cryptocurrency worldwide almost instantly. For example, such platforms were designed with the idea of sending financial transactions globally while having a high level of security.

A user can send cryptocurrency for a worker's salary in real-time and give employees access to their wage whenever they need to use it. Additionally, DeFi allows individuals to rent a product or service by the second.

Access to Stable Currencies

Many people are put off from investing in cryptocurrencies and the crypto industry in general due to the volatile price changes of digital assets. However, some solutions mitigate the issue, such as stablecoins, whose value remains consistent on another asset, such as a popular traditional currency, like the U.S. dollar.

Other coins, like Dai or USD Coin, have values that remain within a few cents of a dollar, which does not fluctuate that much compared to other cryptocurrencies. This feature makes these types of crypto the perfect currency for things like retail.

Ability to Borrow

There are two main types of borrowing cryptocurrency from decentralized providers:

1. Peer-to-Peer - this is where a borrower will borrow digital money directly from a lender without any intermediary.
2. Pool-based - this type of borrowing is where lenders pool their funds together where borrowers will be able to borrow money.

What are the Benefits of Borrowing From a Decentralized Lender?

Privacy

In modern times, the process of borrowing and lending money is focused on the individuals that are involved in the transaction. For example, if you borrow from a bank, they need to know whether you are likely to repay your debt before approving your loan.

On the other hand, decentralized borrowing and lending work without the need for either of the parties involved to identify themselves. The process occurs when a borrower puts up collateral automatically given to the lender if the loan is not repaid. Some lenders also accept NFTs as collateral due to being considered a deed to a unique asset, such as a painting by an artist.

Access Funds Worldwide

A decentralized lender allows borrowers to gain access to funds deposited anywhere in the world. This makes loans much more accessible and provides improved interest rates.

Use of Flash Loans

With decentralized lending platforms, there is something called flash loans that are still an experimental form of borrowing currency. It allows a borrower to enter a loan without providing collateral or giving personal information. However, the biggest drawback of this type of lending is that it is not yet widely accessible to many people.

The process works on the foundation that a loan is taken out and the borrower pays it back in the same transaction. If the borrower cannot pay the loan back, it will revert, and it would be like nothing happened.

Flash loans use funds commonly held in liquidity pools that lenders put money into. If the funds in the liquidity pool are not being used, there is an opportunity for borrowers to utilize them, enter a loan, and repay the debt at the same time it was borrowed.

While the use of flash loans is somewhat limited, there can be times where it is advantageous, such as when a borrower takes a flash loan of a specific type of digital asset to sell for a higher price on a different exchange.

A crucial benefit of flash loans is that they allow users to avoid needing a massive amount of money to make even more money. This type of decentralized lending will enable people with no existing wealth access to money-making strategies.

How To Save Money by Lending Crypto

One way to earn interest and save money using crypto as a source of passive income is by lending cryptocurrencies, which allows your funds to earn interest and help your crypto grow in real-time. A significant advantage of earning in this process is the high-interest rates available compared to traditional banks.

What are the Use of Exchange Tokens?

Decentralized Exchanges, also known as DEXs, allow users to trade various types of tokens whenever they want without giving up control of their assets. This process is similar to a currency exchange when you visit a different country. But the main difference is that the DeFi version is always open for users, which means there will always be someone to accept a trade.

How To Grow Your Crypto Portfolio

Many fund management services are available on various platforms in the cryptocurrency market. Many of these choices allow you to grow or expand your crypto portfolio based on a strategy that you want to use. The key advantages of this are that it is automatic, available to everyone, and is not controlled by a human manager who cuts the profits.

One example of this is the DeFi Pulse Index fund (DPI), which is a fund that automatically rebalances to make sure that a user's portfolio will always have the top DeFi tokens based on market capitalization. Another benefit is that it does not require users to manage any of the processes and gives them the choice to withdraw funds when they want.

Decentralized Insurance

Decentralized insurance is a process that seeks to make insurance a better service for those who want to avail. It allows insurance to become cheaper, makes it faster to pay out, and provides a higher level of transparency. In addition, because any software is vulnerable to bugs and exploits, insurance products are now focusing on protecting users against the risk of losing funds in case of an unexpected incident.

How Do DeFi Protocols Work?

Decentralized Finance (DeFi) provides services without intermediaries by using cryptocurrencies and smart contracts. In the modern world, financial institutions act as the guarantors of transactions. However, this means that these institutions gain great authority over the money that flows through their system.

A smart contract in DeFi replaces the role of a financial institution in any given transaction, acting as the guarantor. This contract can hold funds and even send or take back crypto based on specified conditions or rules. The transaction is also secure because no one can alter the smart contract once it goes live because it will always follow its programming.

An example of a smart contract would be sending allowance or money from one account to another every Friday by programming. Another rule could also be specified so that the process will occur as long as the first account has enough funds to send out to the second account. No one can change the rules of the transaction, such as adding a third account in an attempt to steal the funds.

Additionally, smart contracts are made public for anyone to inspect and audit, meaning that bad contracts will be placed under heavy scrutiny by the community almost immediately. Moreover, the need of having an open-source-based community to oversee developers will slowly diminish over time with the development of smart contracts.

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