Okay, so you know that DeFi stands for decentralized finance.
You probably also know that by decentralized, this means that no one entity, such as a third party or intermediary, are in control.
But how does all this work?
Decentralization is described as the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group.
Through decentralization, platforms assets like Bitcoin are removing middlemen from transactions.
The benefits of a decentralized currency such as bitcoin include:
- Permissionles – meaning that users do not need the authority of third parties such as banks and governments to use the money. Its free and open to use globally
- Bitcoin is immune to seizure
- Using a computational algorithm called proof-of-work (PoW), no one is able to block or censor your transactions
- P2P transactions are very low-cost too, much less than central payment networks such as PayPal, Visa or MasterCard
By decentralzing money, third party institutions such as banks, governments etc cannot make rules and earn income from people exchanging money.
DeFi brings the benefits to financial applications that includes:
In DeFi, the above aspects of finance are decentralized using smart contracts programmed on blockchains like Etherem and Solana, designed to build a wide array of decentralized applications besides just currency.
Smart contracts automatically execute transactions if certain conditions are met.
While bitcoin only supports sending of transactions, a platform like Ethereum that is based on smart contracts can add conditions to a transaction.
For example, a user wants some money to be sent to a friend next Tuesday, but only if the temperature climbs above 90 degrees Fahrenheit according to weather.com. Such rules can be written in a smart contract.
Based on the above, DeFi applications can be designed to offer different solutions to fulfill different financial needs based on pre-programmed conditions. Hence no person is needed to verify if conditions have been met.
Smart contracts have spawned a creative streak across the world with many solutions coming up day after day.
Here is look at 4 of the most popular applications of DeFi:
Decentralized Exchanges (DEXs)
A decentralized exchange is a peer-to-peer (P2P) marketplace that connects buyers and sellers of cryptocurrencies. Unlike centralized exchange platforms like Coinbase and Binance, user have full custody of their funds on DEXs…
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