Have you ever heard of decentralized finance? I bet that not many readers of these lines understand what it is and how it can make life easier when it comes to daily payment transactions.
The very idea of the DeFi system is a new vision of calculation and exchange in the digital world. It is essentially a new financial technology based on secure data, similar to that used in the crypto industry.
World order and power set the rules for centralized financial institutions such as banks and brokerage firms that customers rely on for direct access to capital and financial services. DeFi challenges this centralized financial system by empowering people through peer-to-peer digital exchange.
DeFi eliminates the fees that banks and other financial companies charge for using their services. People store money in a secure digital wallet, can transfer funds in minutes, and anyone with an internet connection can use DeFi.
Centralized Finance vs. Decentralized Finance (DeFi)
Centralized Finance
In a system of centralized finance, money is held by banks, other financial institutions and third parties who facilitate the movement of funds between parties, each of whom (both the bank and the intermediary) charges a fee for the services provided. Credit card collection starts with the merchant and goes to the acquiring bank, which forwards the card details to the credit card network.
The network deducts the fee and requests payment from the bank. Each company in the chain receives a fee for its services, usually because merchants must pay for the use of credit and debit cards.
All financial transactions in the centralized financial system are carried out by banks and other financial institutions. These institutions receive commissions for the services they provide (transfers, conversions, etc.).
Decentralized financing
Decentralized finance removes the middleman and allows people, merchants and businesses to make financial transactions using new technologies. Through peer-to-peer financial networks, DeFi uses security protocols, software and hardware.
Wherever there is an Internet connection, people can borrow and trade using software that records and verifies financial activity in distributed financial databases. The database is accessible from different locations because it collects and aggregates data from all users and uses a special mechanism to validate it.
Decentralized finance removes the need for a centralized financial model and allows anyone to access financial services anywhere, regardless of who they are or where they are. DeFi applications give users more control over their money through personal wallets and personalized trading services.
How does DeFi work?
Decentralized finance uses blockchain technology, which is used by cryptocurrencies. Remember that a blockchain is a distributed and secure database. Applications called dApps are used to process transactions and run the blockchain.
In a blockchain, transactions are recorded in blocks and then verified by other users. If these verifiers agree with the transaction, the block is closed and encrypted; another block is created that contains information about the previous block.
The blocks are then ‘chained’ together by the information in each subsequent block, hence the name blockchain. Importantly, the information in previous blocks cannot be changed without affecting subsequent blocks, so it is impossible to change the blockchain. This concept, along with other security protocols, contributes to the secure nature of the blockchain.
DeFi usage
Peer-to-peer (P2P) financial transactions are one of the basic premises of DeFi. A P2P DeFi transaction is when two parties agree to exchange cryptocurrency for goods or services without the involvement of a third party (intermediary bank, broker, etc.).
The benefits of the DeFi system include:
– Availability
This means that anyone with an internet connection can access the DeFi platform and transactions can take place without geographical restrictions (region, country, continent).
– Low fees and high interest rates
Decentralized finance allows any two parties to directly negotiate interest rates and borrow cryptocurrency or money through DeFi networks.
– Security and transparency
Smart contracts published on the blockchain and records of completed transactions are available to everyone, but do not reveal your identity. The content of the blockchain is immutable, meaning it cannot be altered.
– Autonomy
The DeFi platform is not dependent on any centralized financial institution and is not subject to financial problems such as bankruptcy. The decentralized nature of the DeFi protocols greatly reduces this risk.
Instead of conclusions
DeFi has rapidly entered the global financial world, and its advantages have found their supporters among business participants. The advantages of using a decentralized financing system, which are related to flexibility, economic feasibility, convenience and speed, have become the reason for the increase in the supporters of the use of this system in the modern world.
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- Source: https://www.finextra.com/blogposting/25156/the-trend-of-the-times-or-how-decentralized-financing-is-displacing-banks?utm_medium=rssfinextra&utm_source=finextrablogs
