The term decentralized finance, also known as DeFi, was introduced in 2018 when a group of engineers and entrepreneurs were trying to decide what to call their product of financial services that are built on blockchain, automated and capable of stripping out traditional banks.

Now it’s been four years later, and DeFi is a big business. DeFi is now a preferred option for investors and traders since it allows any user having a crypto wallet to trade digital assets and get loans, among many other things. While the industry is moving, offering more and more opportunities for users, some still try to figure out what DeFi means and why everyone is crazy about this space. This article will explain.

What Is Decentralized Finance (DeFi)?

Decentralized finance (or DeFi for short) is a term used to describe an emerging financial technology based on blockchain ledgers similar to those that cryptocurrencies use.

The Federal Reserve and Securities and Exchange Commission (SEC), located in the US, define the rules for centralized financial institutions such as banks, financial organizations, and brokerages, which are used by people to access capital and financial services directly. DeFi has been designed to eliminate this centralized financial system by giving users peer-to-peer digital exchanges.

To put it simply, DeFi reduces the fee that banks and other financial companies charge for using their services. Therefore, users hold money in secure digital wallets like MetaMask, which can be then easily transferred in minutes, allowing anyone with an internet connection and digital wallet to use DeFi.

Centralized Finance vs DeFi

Centralized Finance

In centralized finance (banks and financial organizations managed by the government), money is held by banks who organize money movement between individuals, where each transaction charges fees for using their services.

The centralized finance operates in a network that clears the fee charge and requests a payment from the bank. Therefore, each entity in the network receives payment for its services, usually because merchants have to pay for the use of credit and debit cards.
In addition, every transaction that happens in centralized finance is overseen, from loan applications to a local bank’s services.

DeFi

As we mentioned, DeFi has been developed to reduce the need for intermediaries by allowing people, merchants, and businesses to make all financial transactions through emerging technology based on blockchain. Providing users with peer-to-peer financial networks, decentralized finances give users security protocols, connectivity, software, and hardware advancements.

Every user with an internet connection can now lend, trade, and borrow using a blockchain that records and verifies financial actions without fees charged by banks. DeFi eliminates the need for a centralized finance party by allowing anyone to use financial services regardless of their location or their identity. DeFi is loved by users and businesses since it gives them control over their money through personal wallets and trading services.

How Does DeFi Work?

DeFi is developed on the secure blockchain ledger that is also used by cryptocurrencies. To be more specific, a blockchain is a distributed and secured database. There are applications known as dApps that are designed to handle these transactions, and they are also based on blockchain.

Blockchain technology records every transaction in blocks and then verified by other users. When users verify the transaction, the block is closed and encrypted. Then another block is created that has all data about the previous block within it.

These blocks are located in a chain which is created through the information in each proceeding block. It is vital to note that information in the previous block cannot be changed or modified without affecting the following blocks, meaning it is impossible to alter a blockchain. That is why DeFi offers a more secure way of trading money in 2022.

DeFi Benefits

Peer-to-peer (P2P) financial transactions are at the core of DeFi. A P2P transaction allows two parties to agree to exchange assets for services or goods without a third party, like banks involved.

DeFi P2P can meet all individual’s loan needs, where the algorithm would match parties that agree on the lender’s terms, allowing the loan to be issued. Payments from P2P can be made using a decentralized application, also known as dApp, and follow the same process in the blockchain. Now people use DeFi for:

Accessibility

Any user having an internet connection can use a DeFi platform and perform transactions regardless of the location.

Low fees and high-interest rates

DeFi allows two individuals to directly negotiate interest rates and lend money using DeFi networks.

Security and Transparency

DeFi works using smart contracts that are published on a blockchain which record completed transactions and make them available for any interested party to review without revealing identity. Blockchains are immutable, so they can be altered or changed.

The Future of DeFi

Even though DeFi has been here for more than four years now, the industry still develops and needs time to grow to fully establish its name on the market. However, there are many companies that support the use of DeFi and provide various software solutions, like valktech.io, to help users enjoy their trading and make it easier to view every transaction.

With the increased use of cryptocurrencies, DeFi will only grow in the upcoming years. Experts even believe that one day DeFi will overcome traditional finances since modern users seek convenience, speed and accessibility in every sphere of their lives.

However, there are still some questions regarding DeFi, like who will be responsible for investigating a financial crime that occurs across protocols, borders, and Defi apps. Other concerns that experts report are system stability, energy requirements, system upgrades, maintenance, and hardware failures.

The Bottom Line

Decentralized finance (DeFi) is a brand-new yet emerging financial technology that eliminates the need for banks or any centralized third party to perform transactions. DeFi also reduced the fees that banks and other financial companies charge, promoting the use of peer-to-peer transactions, transparency and security.

• Coinsmart. Europe’s Best Bitcoin and Crypto Exchange. Click Here
• Platoblockchain. Web3 Metaverse Intelligence. Knowledge Amplified. Access Here.
• Source: Plato Data Intelligence: Platodata.ai