What is DeFi? A Beginner's Guide

DeFi

DeFi is an abbreviation of the term Decentralized Finance. A new medium of financial services based on a method of peer to peer transactions through the blockchain technology.  In simple terms it can be said that DeFi aims to cut down the interference of middlemen/third party in between a transaction. Peer to Peer transaction means that a person can make a transaction with another person directly and this rapidly gaining popularity over the traditional financial services. DeFi offer most things a centralized financial institution offers, like interest, borrow lend, insurance etc.

So, now let's take a deep look at how DeFi is different from traditional form of finance.

 

WHAT IS DECENTRALIZED FINANCE?

Decentralized Finance is a way that helps people to do financial transaction directly with the other person utilizing the blockchain technology. This cuts the middlemen in between and makes the transactions quick, cheap and more efficient.

You can access your assets in digital wallets, with DeFi. This offers an access to diverse ways of services, from trading to peer to peer transaction. Anyone that have good internet connection can make transaction with DeFi. The major aim of DeFi is to make the finance available to everyone having an active internet connection.

ADVANTAGES OF DeFi

Some of the potential advantages of DeFi over a Centralized System:

1.      Quick

Before the evolution of DeFi we have to face a lot of difficulty while taking a credit from the bank and this is too much time consuming. But with the evolution of DeFi, you can get all the banking facilities available at just one click. As long as you have an active internet connection you have access of the DeFi  that will give you the access to the market from anywhere and at anytime.

2.      Security

One of the major yet sensitive information is the security. Data can be stored in thousands of diverse nodes, that prevents the fear from attacking and hacking into the system to command over the control.

3.      Profitability

DeFi allows the users to earn as higher interest rates. Rates of DeFi are way higher than any other Traditional banks.

HOW DOES DeFi WORK?

DeFi utilizes smart contracts (these are self-executing contracts) that do not require any middlemen in between a transaction or act like a guarantor of the transaction. People who are involved in this decentralized ecosystem of transaction transact with each other, each and every transaction is secured via blockchain technology. You are the only one in control of your assets, DeFi products won't take the custody of anyone's funds.

With DeFi wallet, you can access your all funds and assets on the platform. DeFi wallet is a secure digital wallet that consists your all funds and assets record. Through smart contracts you and the other party can do the transaction this means that you both have agreed on certain conditions. Be very cautious while setting a smart contract, once it is all set you can not alter or edit it and the funds can't be re-routed or send to different account.

DeFi vs. CeFi

DeFi is Decentralized Finance which aims to cut the interference of middlemen in between a transaction whereas CeFi is Centralized Finance which includes the involvement of middlemen in between a transaction.

CeFi is the default financial ecosystem prevailing in all over the world right now whereas DeFi is making its impact on people but not everyone knows about it.

DeFi leverages the power of blockchain technology where there is no blockchain technology involvement in Centralized Finance.

Elimination of middlemen automatically cuts the cost and light up the things faster, financial services are also accessible with DeFi. Not everyone can open an account in bank or neither they have given access to specific financial services. With DeFi you can do this as DeFi financially empowering billions of people who don’t have access to the banking services.

IS BITCOIN DeFi and HOW DOES IT WORK?

Bitcoin is the oldest and the biggest currency in the crypto world as per the market cap. The major part of the projects of DeFi has been created on the Ethereum blockchain (smart contract platforms). 

But with the majority of people owning Bitcoin and some of the proponents of Bitcoin also sharing the goal of cutting the middleman out of the financial transaction has led to find out the solution for Bitcoin owners to invest in DeFi. It works on the deployment and the diverse ways of blockchain technology. Bitcoin holders can use Bitcoin on Etherem with a token named as Wrapped Bitcoin (WBTC). The WBTC can be used as a DeFi platform for Bitcoin just like any other asset.

DOWNSIDES OF DeFi

1.      Volatility

Market is very volatile, it keeps on changing time to time. Every little second can alter the present market condition. Everybody knows that crypto market can go up in value and that is the reason why Bitcoin and crypto have come in the knowledge in recent years. Everything that goes upside also has to comes downside too. It is the fact that crypto currencies are way more volatile than the fiat currency.

2.      Poor Use Experience

This is relatively a new prospect, and you know that participation require additional efforts. DeFi applications transfer the authority from the centralized way of using to the individual user. Finding the application that is most suited to your specific requirements can involve a significant amount of study. It is also beneficial to have a thorough understanding of crypto currencies and blockchain technology in general, since this will allow you to make judgments that are more informed.

3.      Smart Contract Problems

Smart Contracts Problem is becoming a major source of issues for so many DeFi projects. A minor fault in the code of smart contracts can lead to loss of funds.

4.      Scalability

This is one of the major problems that are evolving in all the blockchain systems. As compared to the transaction rates, network is not growing and this thing is putting system in a questionable position, as agility of the system is facing these impacts.