What is Decentralized Finance / DeFi – A beginner’s manual to DeFi

Decentralized finance (DeFi)

Financial services using public blockchains, such as Ethereum, is known as “decentralized finance.” With DeFi, you can do many of the same things banks do, but it’s quicker and doesn’t involve any paperwork or third party. This means you have the potential to earn interest, borrow, purchase insurance, trade derivatives, exchange assets, etc. It is a worldwide, peer-to-peer, pseudonymous, and open-source cryptographic protocol that allows anybody to participate. 

The Background on DeFi

Using distributed ledgers like those used by crypto, DeFi is an emerging financial technology. Banking and financial institutions are no longer in charge of money, economic goods, and services in the world of DeFi.

DeFi has several appealing features for users, including;

  • This service avoids the fees banks and other financial institutions often impose on their customers.
  • Instead of depositing your money in a bank, you store it in a secure digital wallet under your control.
  • You don’t need permission to use it without an internet connection.
  • In a matter of seconds or minutes, you may transfer money all over the world for free.

The Basics of Decentralized Finance 

It is possible to conduct transactions between individuals utilizing blockchain networks rather than via centralized organizations like banks as decentralized finance. This eliminates the intermediary, speeds up processing, lowers costs, and improves efficiency in financial transactions.

DeFi allows you to use digital wallets to store your assets safely and smart contracts to execute trades. Decentralized exchanges and peer-to-peer lending are only two examples of the many financial services that may be accessed in this way. Since everyone with an internet connection may use DeFi, it opens up the world of banking to a far broader audience.

How Does Defi work?

Blockchain technologies, which are used by cryptocurrencies, are used in decentralized finance. A distributed and secure database or ledger is known as a blockchain. Decentralized applications, or dApps, power the blockchain

Transactions are stored in blocks on the blockchain and then cross-verified by other people using the system. Close and encrypt the old block and produce a new one containing information about it if the verifiers agree on the transaction.

Blockchain refers to the blocks being “chained” together based on the information contained in the preceding block.  Blockchain is safe because of these and other security mechanisms to avoid subsequent blocks. 

DeFi vs. Centralized Finance

Financial transactions are presently handled by third parties and intermediaries carefully monitored by local authorities in a centralized financial system. A key benefit of decentralized finance is that it eliminates the need for intermediaries like conventional banking institutions, allowing users to deal directly via financial apps on the blockchain network.

DeFi reduces costs and speeds up the transaction process by eliminating the need for intermediaries. Many people are denied the opportunity to create a bank account or use certain financial services in centralized banking. As a result, DeFi has the potential to empower billions of individuals who are now unable to access banking services.

Additionally, DeFi offers the benefit of allowing for greater flexibility when it comes to trading hours compared to centralized finance.OPEN ACCOUNT

Criteria Centralized Finance (CeFI) Decentralized Finance (DeFi)
Conventional trading activities Allowed Allowed
Cross-chain Services Allowed Allowed
Crypto trading Permitted Permitted
Customer Support Tailored for customer needs No direct assistance with limited support
Fiat to Crypto conversion Allowed Allowed
KYC Requirements Access to CeFi services is subject to specific criteria. To use DeFi services, no KYC is necessary; all that is
needed is a unique identification number.
Liquidity This does not apply to all assets. This does not apply to all purchases.
Support for stablecoins Permitted Permitted
Transfer of custody of funds. There will be no change in ownership of money invested
by a single company.
Defi transactions need the transfer of control.
Transparency of transactions A centralized organization eliminates any openness. A centralized organization eliminates any susceptibility.
Trust Focused on business On the cutting edge of technology and how things work,

Why is DeFi important?

DeFi builds on Bitcoin’s basic premise of digital money, offering a completely digital alternative to Wall Street but without the attendant expenses (think office buildings, trading floors, banker salaries) (feel office towers, trading floors, banker salaries). Open, accessible, and fair financial markets that everyone with an internet connection may access may arise from this.

Understanding Decentralized Finance

Understanding decentralized finance and how it works helps to understand how centralized finance differs from DeFi.

Centralized Finance

Your money is held and used for profit under centralized finance. Third parties facilitate funds transfer between individuals and organizations. Consider a transaction for a gallon of milk made using a credit card. The credit card network alerts when the merchant charges an acquiring bank. 

Once the transaction clears the web, your bank gets invoiced. Your bank may authorize charges, which grants network and merchant authority. Using credit or debit cards necessitates payment from the merchant to each firm in the chain.  

Loan applications may take weeks; you may not be able to use a bank while you’re on vacation. 

Faster transactions and a more comprehensive range of services are the goals of DeFi.

Decentralized Finance

Financial transactions may be carried out without the need for intermediaries, thanks to the use of cutting-edge technology. Security protocols, connections, software, and hardware are all used in peer-to-peer financial networks.

Online lending, trading, and borrowing are made possible by software that records and verifies financial transactions in distributed databases. Using a consensus method, a distributed database receives and aggregates user data.

Financial services may be obtained by everyone, regardless of location, thanks to decentralized finance.

DeFi consumers have more control over their money thanks to personal wallets and trading opportunities.

How to Invest in DeFi

Track Your DeFi Investments with INX. Everyone should be able to start investing in DeFi on a secure and regulated platform to take advantage of all that it has to offer. Trading cryptocurrencies on the INX platform is safe since all transactions are done through a regulated entity and comply with relevant rules, along with industry-standard protection methods that protect your privacy and security.

How to Create an INX Account in 3 Easy Steps (crypto.inx.co)

  1. Create an account and verify it.
  2. To begin investing, deposit money into your account or wallet.
  3. Place your cryptocurrency purchase now.

FAQ

What are intelligent contracts, DeFi?

The buyer and seller’s conditions of the agreement are encoded directly into lines of code in a smart contract, which then executes itself as outlined in the contract. The code and transactions are available to everyone in a distributed, decentralized blockchain network.

What are stablecoins?

To maintain a stable value, the cryptocurrency is connected to some asset outside cryptocurrency (the dollar or euro, for example).

What is so special about DeFi?

Some of the primary advantages of DeFi for many users are: It removes the costs that banks and other financial businesses charge for utilizing their services, you hold your money in a secure digital wallet instead of putting it in a bank, and anyone with an internet connection may use it without obtaining authorization.

What is the difference between DeFi and crypto?

Bitcoin is a kind of money that functions on its blockchain, much like conventional cash. While banks and other traditional financial organizations, like credit unions, enable you to lend, borrow, and trade currencies like Bitcoin, DeFi allows you to do the same with all types of cryptocurrencies.

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