If you find yourself constantly questioning what is DeFi, we’re here for you. It’s basically a financial advancement ready to knock conventional finance out of the park. DeFi takes the basic ground of digital money (like Bitcoin) and expands on it. According to some, it’s an entirely digital alternative to Wall Street, but without the associated costs of towers and labor.
What is DeFi?
Short for decentralized finance, DeFi is an emerging technology made to enable cryptocurrency-based transactions and financial services on public blockchains. This technology challenges the norms of traditional centralized institutions (like banks and brokerages) and gives individuals the power of peer-to-peer (P2P) digital exchange.
DeFi can do most things that banks provide like earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, etc. But with DeFi, it’s faster and doesn’t require a third party or fees. Instead, anyone with an internet connection can hold their money in a secure digital wallet and complete transactions in minutes.
What are its Uses?
DeFi came to life with the goal to fulfill a very wide range of needs, some of which are as follows:
- P2P lending and borrowing: this allows users to lend out their crypto and earn interest every minute, not just once per month. As for borrowing, they can obtain loans instantly without any paperwork.
- Insurance: with the successful implementation of smart contracts, all issues with the traditional insurance system can be solved.
- Trading: Make peer-to-peer trades of your crypto assets as if you’re buying and selling stocks without any kind of brokerage.
Benefits of Defi
This financial novelty comes with a wide set of advantages. Firstly, being open to everyone without the need for paperwork or applications. All a user needs is a digital wallet and they’re good to go. Secondly, being pseudonymous. Transactions require none of your personal information, not even your name. Next comes flexibility. DeFi allows users to complete transactions anywhere without the need for authorization or fees. Next on the list is speed. Interest Rates and rewards often update rapidly (as quickly as every 15 seconds), and can be significantly higher than traditional Wall Street. And lastly, transparency. Everyone can see the full set of transactions that private corporations do not usually share.
Like any technological phenomenon, DeFi also comes with downsides. For example, the Ethereum blockchain’s fluctuating transaction rates lead to active trading becoming expensive. Moreover, your investments could get highly volatile, depending on which dApps you use and how. Besides, you’re gonna have to do your own taxes and records as regulations can vary between regions.
DeFi in Conclusion
When it comes to digital assets, smart contracts, and dApps, major credit must be given to the Ethereum ecosystem. These tools are what made DeFi a reality, as they solved the primary problems of the traditional system. But the lack of regulation rendered it vulnerable to hacks and scams. Learn more on fraud prevention.