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Heard a lot about decentralized financing and you wonder what it is and how it functions? Read this article to find answers.
Decentralized financing (DeFi)
The first thing one hears when cryptocurrency is mentioned is that it is decentralized finance. As a newbie, it is inevitable not to wonder what this is all about. However, this article will be explaining everything you need to know as a starter about decentralized finance.
What is Decentralized Financing?
Decentralized financing is a transition from traditional centralized financial methods to peer-to-peer financing enabled through the use of centralized technology. While centralized financial systems are run by exchanges where transactions must be moved from one central location to another, decentralized financing is provided by a code that runs on a decentralized infrastructure. The goal of decentralized financing is to create financial services on a decentralized basis using blockchain and small contracts.
Decentralized financing, also known as DeFi, is advantageous and better than a centralized financial system. What is its advantage? It contains highly programmable smart contracts that automate execution and enable the creation of new financial instruments in digital assets. The data cannot be tampered with because the blockchain architecture increases security and verifiability. The composite software stack ensures that DeFi protocols and applications are integrated and complementary. On the public blockchain, each transaction is broadcast for verification by other users on the network.
How does it work?
With DeFi, anyone with a wallet and an Internet connection, regardless of location and without funds, can access DeFi applications. DeFi participants always keep their personal data in custody. One of the main goals of decentralized finance is to stop third parties from participating in transactions. This is why DeFi relies on Ethereum blockchain technology as it is more advanced than other blockchain technologies, easy to use, and adaptable depending on the needs of the particular system. DeFi is irreversible and is rapidly gaining ground in the financial world to the point where governments and other financial institutions take an interest in it since anyone has enough room to step in and create a new financial product.
This process has not yet been fully implemented, but some countries such as Japan, Estonia, Sweden, and many others are working hand in hand to make cryptocurrencies a new type of currency and are therefore investing in DeFi technologies.
To better comprehend the benefits of using decentralized finance, we will take a quick example of one which is Bitcoin. Due to its virtual nature, there are inherent benefits that come with using it, one of which is autonomy. It allows users to have autonomy over their economy, meaning users can spend their money without the influence or interference of a third party.
Also, there is discretion and anonymity. unless a bitcoin trader publishes his transactions and reveals his identity, no one will be able to trace the transaction back to him. With bitcoin, transaction fees are equally very low and these transactions are fulfilled in a split of seconds. There is therefore no need to wait for hours or days for a single transaction to be completed.
In short, decentralized financing is a general term associated with the vision of a financial system that requires no intermediaries such as banks or insurance companies and operates solely on the basis of smart contracts. These applications aim to provide traditional financing services without any authorization, globally and transparently.
Blockchains and cryptocurrencies have a lot to offer to the real world, but the only problem is that they seem to have a big impact on centralized financial systems. This is due to the fact that there are so many new processes and decentralization is taking financial markets to a new level.