Edgar Cervantes / Android Authority
Decentralized finance, or DeFi, is rapidly emerging as one of the most promising applications of cryptocurrency technology. And while it may sound complicated, DeFi is just an umbrella term used to describe financial products and services that are completely independent of any authorities.
Imagine a world where common services such as loans, cross-border payments, insurance, and retirement savings don’t require a bank account or approval from an authority. That is DeFi’s vision essentially, to establish an open standard. This new standard doesn’t leave room for predatory intermediaries or third parties either — and promises to herald a new era of financial efficiency, inclusion, and transparency.
Indeed, those are a lot of bold claims. So in this article, let’s examine this emerging technology, understand how it works, and how it will likely influence your financial life in the future.
What is Decentralized Finance (DeFi)?
Edgar Cervantes / Android Authority
Before we dive into the nitty-gritty of how DeFi works, it’s important first to understand the way things currently work in the world of traditional finance, or TradFi as it is sometimes called in cryptocurrency circles.
Say you want to trade one asset for another, like stocks for cash — you would need an exchange or trading platform to facilitate this trade. Now assume you’re in the market for a new car or house and require a loan. What are your only options? A bank or local credit union, at best. Whether you’re trying to save money for your retirement or transferring money abroad, you typically have to trust one or multiple institutions to achieve that goal.
On the surface, trusting such institutions doesn’t seem too problematic as they’ve been around for decades, if not centuries. Dig only a little deeper, though, and the finance sector’s controversial past, including events such as the 2008 mortgage crisis, can leave you wondering if your trust is perhaps misplaced.
However, even if you aren’t distrustful of modern banking practices, you are undoubtedly affected by them in one way or another. High commissions, arbitrary restrictions, and red tape are commonplace today, despite technology to eliminate these long-standing complaints.
The DeFi sector hopes to eliminate the banking industry’s high commissions, arbitrary restrictions, and red tape.
Enter the DeFi sector, which aims to finally fix these issues by eliminating central authorities and intermediaries. What’s replacing them, you ask? An automated computer network that distributes control instead of concentrating it at the top. DeFi applications are typically built on top of decentralized blockchain networks such as Ethereum.
DeFi has the potential to take blockchain technology from serving as a simple record of payment to a full-fledged economy. DeFi proposes recreating these financial services — including loans,…
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