DeFi is a term that’s currently causing a major buzz in the crypto world. For a long time now, Bitcoin and Ethereum have been the talk of the town as far as cryptocurrency is concerned.
Well, the attention of investors seems to be shifting to DeFi-related assets. As a result, these digital coins have experienced an impressive high in the last few months. Read on to find out what is DeFi and why do we need it.
What is DeFi?
DeFi is short for decentralized finance and refers to a crypto ecosystem that uses blockchain technologies to cut out the intermediaries (lawyers and banks). In essence, the system offers financial services through the use of automated smart contracts. The end result is maximized efficiency and reduced costs.
Cryptocurrency assets, in general, have made it possible to do away with government regulations and bank protocols. The system is decentralized, meaning it is not backed by a central authority.
Crypto trading is more like Forex trading—the only difference is that it uses digital coins (Bitcoin, Ethereum. Ripple, Monero, and Dash) instead of traditional currencies. So essentially, an investor trades the weekly (or daily) volatility of the coin or uses the buy and hold strategy to make a profit. The infographic below sums up the benefits of decentralized cryptocurrencies.
Benefits of DeFi Cryptocurrency
Compared to BTC, DeFi is a lot more open and decentralized. Satoshi, the creator of the original Bitcoin system, only made the storage and issuance of money decentralized. Many other aspects of the system, including the exchanges are still centralized. In addition, trading cryptocurrency means working with some organizations that often lack accountability and transparency.
The DeFi technology ties the loose ends of the traditional blockchain system. Whether it is managing deposits, liquidating collateral assets, or handling loans, the technology can facilitate it via smart program codes.
Since the system is built on the Ethereum network, the contracts can neither be manipulated nor terminated by any entity. They can only be executed with certain conditions. The two leading benefits of the DeFi technology is access to assets and the ability to create new financial products with the global market.
How does the DeFi Lending Network Work?
With DeFi, you can negotiate an automated loan from a total stranger in a different part of the world. The best part about it is that you don’t have to deal with cryptocurrency brokers or bank employees.
There are a number of DeFi dapps from where you can create stablecoins (crypto assets with values pegged to the American dollar), lend out your cash for some interest, exchange your assets with someone else, take a loan, and more. Some of the DeFi dapps include Ethlance, Peepeth, Gitcoin, cent, Bitrefill, and MakerDAO just to mention a few.
Each dapp has its own limits on how much you can borrow. If your asset’s price dips below the market value, the contract will sell it at a specified amount to protect your lender. Before lending money, you should know the actual value of the collateral and similarly the pricing information. It’s a bit more complicated than that but this is the simple version.
DeFi offers financial services that are transparent, flexible, and open. Unlike the traditional blockchain technologies such as BTC and Ethereum that offer incomplete decentralization, DeFi is open all the way.