What is DeFi? How does it work?

What is DeFi? How does it work?

DeFi (short for “decentralized finance”) refers to financial services provided by public blockchains, most notably Ethereum. You can earn interest, borrow, lend, purchase insurance, trade derivatives, exchange assets, and more with DeFi, but it’s faster and doesn’t involve paperwork or a third party. DeFi is global, peer-to-peer (directly between two people, not through a centralized system), pseudonymous, and available to all, as with crypto in general.

What is DeFi? How does it work?
What is DeFi?

How does it work?

Users engage with DeFi through software known as dapps (“decentralized apps”), the majority of which are now based on the Ethereum blockchain. There is no need to fill out an application or open an account, unlike at a traditional bank.

Here are some of the ways people are now using DeFi.

1. Getting a loan

Instantly get a loan without having to fill out paperwork, even for extremely short-term “flash loans” that traditional financial institutions don’t give.

2. Trading

Make peer-to-peer crypto asset trades just like you could buy and sell stocks without using a brokerage.

3. Lending

Earn money and benefits every minute, not just once a month, by lending out your cryptocurrency.

4. Buying derivatives

Put long and short bets on certain assets. Consider them the cryptocurrency equivalent of stock options or futures contracts.

5. Saving for the future

Put part of your cryptocurrency into alternative savings accounts to achieve better interest rates than you’d get from a bank.

What is DeFi?

Why is DeFi important?

DeFi expands on Bitcoin’s basic premise of digital money to provide a fully digital alternative to Wall Street, but without the associated costs (think office towers, trading floors, banker salaries). This could lead to more open, free, and fair financial markets that are accessible to anybody with internet access.

What are the advantages?

1. Flexible

You can transfer your assets wherever you want, without having to ask permission, wait for long transfers to be completed, or pay exorbitant costs.

2. Fast

Interest rates and bonuses are often updated (as often as every 15 seconds) and can be much greater than those found in the traditional stock market.

3. Transparent

The entire set of transactions is visible to everyone involved (private corporations rarely grant that kind of transparency).

4. Open

You are not required to apply for anything or create an account. You only need to create a wallet to gain access.

What are the drawbacks?

  • For tax purposes, you must keep your own records. Regulations can vary from region to region.
  • Your investment may see considerable volatility depending on which dapps you use and how you use them—after all, this is new technology.
  • Active trading on the Ethereum blockchain might become costly due to fluctuating transaction rates.

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Author: entplusgh.com
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