Have you ever heard of DeFi? If you do not know DeFi explained: what is DeFi and what is so unique about it, this article will help you to learn about it. DeFi is the term for financial applications that use blockchain instead of banks.
DeFi explained: what is DeFi?
Decentralized Finance (DeFi) is a financial system that operates on a decentralized network of computers, rather than a single server. DeFi is an emerging digital financial infrastructure that theoretically eliminates the need for central banks or government agencies to approve financial transactions.
DeFi applications are financial products that run on public blockchains like Ethereum. These products are unlicensed, which means they do not use third parties. Unlike financial intermediaries like brokers and banks, everything goes into the agreement automatically through smart contracts.
Most of the financial services that can be defined as DeFi can be found on the Ethereum network, the second largest cryptocurrency market, which also acts as a platform that allows other blockchain applications to be built on it (transaction fees are paid using Ethereum's cryptocurrency Ether ) ). By using a decentralized application or dApp, two or more parties can exchange, borrow and trade directly using blockchain technology and smart contracts without the involvement and cost of middlemen.
What's so unique about DeFi?
DeFi has 3 key features which make DeFi to be unique.
First, it's "open," which means you can use the app by creating a wallet -- usually without revealing any identifying information, such as name and address. This is theoretically (if not technically) simpler than having a bank account.
Second, you can transfer funds almost instantly via the blockchain, so there is no need to wait for bank transfers to clear.
Third, interest rates are (at least for now) much better than traditional banks, although transaction costs vary by the blockchain network.
How does DeFi work?
Decentralized finance uses the blockchain technology that cryptocurrencies use. A blockchain is a distributed and secure database or ledger. Applications called dApps are used to process transactions and run the blockchain.
To facilitate peer-to-peer business transactions, users use dApps, most of which can be found on the Ethereum network. Access to a wider range of DeFi services and dApps including coins (Ether, Polkadot, Solana), stablecoins (whose value is pegged to currencies like USD), tokens, digital wallets (Coinbase, MetaMask), DeFi mining (aka liquidity) mining), yield farming, staking, trading, and borrowing and saving using smart contracts.
These blocks are "linked" together by the information in each in-progress block, giving it the name blockchain. Information in previous blocks cannot be changed without affecting subsequent blocks, and therefore the blockchain cannot be changed. This concept, along with other security protocols, provides the security of the blockchain.
Hopefully now you may know DeFi explained: What is DeFi and what is so unique about it? In November 2021, risk management firm Elliptic estimated that DeFi users have lost $10.5 billion to hacks and scams over the past two years.
