What is Decentralized Finance (DeFi)

DeFi or also known as Decentralized Finance, is a term used to describe financial products that are built on permissionless and decentralized blockchains like Ethereum and Solana.

This includes all sorts of exciting financial applications that offer lending, borrowing, trading, insurance and much more. The possibilities are almost limitless.

Traditionally, if you want to borrow US$10,000, you first need some assets or money already in the bank as collateral.

A bank employee reviews your finances, and the lender sets an interest rate for the repayment of your loan. The bank gives you the money out of its pool of deposits, collects your interest payments and can seize your collateral if you fail to repay.

Everything depends on the bank: It sits in the middle of the process and controls your money.

DeFi turns this arrangement on its head by re-conceiving of financial services as decentralized software applications that operate without ever taking custody of user funds.

Want a loan? You can get one instantly by simply putting cryptocurrency up as collateral. This creates a “smart contract” that finds your money from other people who made a pool of funds available on the blockchain. No bank loan officer is necessary.

Everything runs on so-called stablecoins, which are currency like tokens typically pegged to the U.S. dollar to avoid the volatility of bitcoin and other cryptocurrencies. And transactions settle automatically on a blockchain – essentially a digital ledger of transactions that is distributed across a network of computers – rather than through a bank or other middleman taking a cut.

In short, DeFi refers to a movement with a goal is to build a better financial system. It leverages the power of permissionless blockchain technology to create a transparent, permissionless, cheaper, open-source and decentralized fintech.

Read more about the rewards and risks of Defi here.

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