What is DeFi? And why it´s the future

DeFi is a decentralized financial system based on the blockchain technology, smart contracts and cryptography in order to remove the control banks and institutions have on money and financial services.

With DeFi, you can do most of the things that banks allow and more new things with a bunch of benefits.

Characteristics

The world of decentralized finance stands out because of its:

  • Transparency: as every transaction is public and appears in the blockchain.
  • Speed: as transactions take place in a matter of seconds or minutes depending on the network.
  • Availability: markets are open 24/7
  • Anonymity: cause you don’t need to provide your personal information.
  • Open: everyone can use it.

How Cefi works

First of all let’s take a look at how our world based on centralized finance works.

Imagine you buy a pizza using your credit card, after you swipe or enter your card into the point of sale device, the payment processor sends out for authorization through the credit card network, the issuing bank(the one of the client) approves or declines the transaction based on funds available. The transaction is then sent back to the payment processing network, passed to the payment  processor and finally to the point of sale device at the store where the transaction is completed in a matter of seconds. Then the issuing bank sends the money for the purchase to the payment processor company.

At the end of the day the merchant will send out all of their transactions to the payment processor company in order to get the money deposited in the merchant bank account. And finally the issuing bank will send you a bill for the purchase.

DeFi

This whole process not only cost a lot of money but also could be easily done with DeFi. You only need to send money from your wallet to the merchant wallet and the blockchain would do the rest.

As you see, peer to peer financial networks eliminate intermediaries.

Accessing the DeFi environment only requires an internet connection in order to get access to decentralized apps (dApps). Unlike a conventional bank, there is no application to fill out or paperwork to do in order to use them. With them you can lend out your crypto to earn interest, getting a loan without paperwork but with security protocols to avoid scams, trading crypto as if they were stocks, saving your crypto while you earn interest and making futures.

Stablecoins 

USDT
USDC

Stablecoins are an important aspect of the DeFi world as nowadays cryptocurrencies are very volatile. Stablecoins have their value pegged to another asset, usually the US Dollar in order to solve the volatility problem. USDT and USDC are some examples.

Smart contracts

DeFi uses smart contracts in order to provide many of these services without intermediaries. A smart contract is a piece of code that does something if something else happens. No one can alter a smart contract once it is submitted to the blockchain. They are also open source meaning that no one owns it and anyone can read them cause they are on the blockchain.

Blockchain – cryptography

Blockchain is the core technology to make transactions in a decentralized financial system. A block consists on a cryptographic hash of the previous block, a timestamp of the the cration of the block and information about the transactions. In blockchain cryptography is used to secure the information contained in each block, making counterfeit or double-spend nearly impossible, preventing third parties from modifying it and enabling the connection between the last block of the chain to the new node safely.

Hopefully by now you understand what DeFi is and the power it has. Leave a comment below if you have any doubt!

Graphic resources: https://controlc.com/f349edc4

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