What is DeFi? A beginner's guide to decentralized finance

DeFi is a decentralized finance protocol that enables anyone to build financial products on top of the Ethereum blockchain.

DEFINITIONS

Crypto1earn

10/9/20222 min read

DeFi
DeFi

What is DeFi?

Definition

This is a general term that refers to peer-to-peer financial networks that use public blockchains as the backbone of their operations for peer-to-peer transactions.

In the financial sector, DeFi is typically referred to as "decentralized finance" or "decentralized financial services". In DeFi, you can trade derivatives and assets, earn interest, borrow, and lend, buy insurance, buy insurance, and buy insurance - but faster and without third parties. DeFi is global, peer-to-peer, pseudonymous, and open to everyone because it's peer-to-peer.

Why is DeFi important?

By taking Bitcoin's basic premise - digital money - and extending it, DeFi creates a digital alternative to Wall Street without the associated costs (like trading floors, office towers, bankers' salaries, etc.). Any individual with access to an internet connection will be able to access more open, free, and fair financial markets as a result of this.

What are the benefits?
  • You do not have to fill out any applications or create any new accounts in order to use our services. All you need to do is create a wallet and you will have access to everything.

  • No need to give your name, email, or anything else.

  • Move your assets anywhere at anytime without waiting for transfer to finish, paying fees, or asking for permission.

  • Investing with a company that updates interest rates and rewards at a rapid pace (sometimes as fast as every 15 seconds) is a great way to earn higher returns than typical Wall Street investments.

The whole set of transactions is transparent (private companies are rarely transparent).

How does it work?

The Ethereum blockchain is currently used to run most DeFi dapps ("decentralized apps"). The process of opening a bank account is not similar to that of opening an account in a conventional bank.

DeFi is being used in the following ways:

  • Get instant interest and rewards by lending out your crypto every minute.

  • The loan process is easy and you can obtain a loan immediately without the need to fill out any paperwork, including short-term "flash loans" that are not available from traditional financial institutions.

  • The main advantage of a platform such as this is that you can exchange crypto assets peer-to-peer. This is similar to buying and selling stocks without going through a brokerage office.

  • Earn better interest rates than you'd get from a bank with crypto savings accounts.

  • Investing in derivatives is the act of buying assets and betting on them long or short. Imagine them as crypto stock options.

What are the downsides?
  • Active trading can become expensive on the Ethereum blockchain due to fluctuating transaction rates.

  • Since this is, after all, a new technology, your investment could experience high volatility depending on which dapps you use and how you use them.

  • For tax purposes, you are required to maintain a record of your own. Each region may have its own regulations.