Blockchain

What Is Decentralized Finance(DeFi) & How Does It work?

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Decentralized finance (DeFi) is an open finance movement that makes the cryptocurrency’s payment universally accessible. But many of us are not aware of this decentralized finance system. It is an open-source and transparent financial service suitable for everyone and without any central authority. In this article lets discuss DeFi: an open finance movement. 

Decentralized Finance(DeFi)- An Open Finance Movement!

Decentralized finance is a system that comprises several financial applications that are developed on the top of the blockchain system. It helps to promote the decentralized networks that create different types of open-source financial services. The functions of DeFi are:

DeFi

  • Monetary banking services like issuance of stable coins
  • Providing peer to peer borrowing or lending platform
  • Providing advanced financial services like tokenization platforms, DEX, etc.

An open alternative to every financial service you use today is possible on smart contract blockchains, like Ethereum smart contracts. They are programs running on the blockchain that can execute automatically when certain conditions are met. These smart programs are known as decentralized applications or dapps. A DApp or a decentralized application is a computer application that runs on a distributed computing system. It has been popularized by distributed ledger technologies like Ethereum blockchain. They can run on both peers to peer networks and in a blockchain network. DApps have been around since the launch of Ethereum and smart contracts. 

Difference Between Defi and other Banking Services

  • Unlike traditional banking services, the operations of the decentralized financial system are not controlled by any centralized authority. 
  • The DeFi is processing on the basis of programming codes (smart contracts)
  • Blockchain is a transparent technology that allows anyone to audit the programming codes.
  • Users trust decentralized technology more than traditional centralized financial services because anyone can conduct an audit on the processing of different financial activities.  
  • DeFi services are available to anyone and everywhere with an internet connection.
  • Users can directly interact with their smart contracts in the crypto wallet. There are no regulations or formalities like other financial services.
  • It provides a flexible user experience   
  • A new DeFi app can be formed by combining the functions of already existing DeFi products.

DeFi and Cryptocurrency

Bitcoin and Ethereum are controlled by large decentralized networks. The central authority has no power or right to rule over them. Thus Bitcoin and Ethereum are the largest DeFi applications. The aim of forming DeFi is to construct a banking system that is open, transparent, and in a permissionless way.

But the biggest risk of using them as a primary means of the financial system is that there is a high chance of being hacked. Jeffy Dorman, chief investment officer at digital asset management firm Arca, quoted that “Technologically, I think it’s brilliant”. So let’s believe and look forward to this decentralized finance system that eliminates the need for all banking intermediaries.       

 

Gerald Rene is a journalist based in the US and the former managing editor of a cryptocurrency news outlet. He has been involved in the cryptocurrency industry for over three years. He has written for many outlets and contributed to cybersecurity and technology publications. And his passion currently lies within scalable securities and stability protocols to help grow cryptocurrency investment and bring mass adoption.

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