DeFi is an integral part of the modern crypto economy. They are analogous to the traditional banking sector. The abbreviation DeFi stands for Decentralized Finance. This concept refers to a set of various services, tools, and applications. They are based on the blockchain and are aimed at performing various functions related to the cryptocurrency world. DeFi exchange aims to help traders carry out various transactions for the sale and purchase of cryptocurrencies to make a profit.
What is DeFi in cryptocurrency in simple terms
DeFi is a kind of space. It consists of financial protocols and applications. They work based on smart contracts and are built on a blockchain. Most projects have launched and built their services on Ethereum, but other blockchain networks are also gaining momentum as platforms for new projects. In simple words, we can say that DeFi is an analog of banking services that are offered to work with crypto assets. The main difference lies in a wider set of tools.
A smart contract is a virtual contract and a computer program. Its conditions are prescribed by both parties to the transaction, and the execution is carried out automatically. Smart contracts contribute to the automation of projects, companies and decentralized applications. They can be the basis for:
- credit deal;
- trading on the stock exchange;
- ordinary purchase in the online store;
- other options.
Smart contracts are involved in the successful operation of the DAO. Smart contacts are already beginning to be used in the legal and real estate industries.
When did DeFi appear?
The launch of Ethereum opened up smart contracts to the world of cryptocurrencies, which were written using programming. Ethereum has become the backbone of DeFi. This event gave rise to decentralized finance as a separate sector.
Useful information about DeFi
The following table provides useful and basic data (characteristics) about DeFi.
|Work Features||The work is based on the use of smart contracts to pay for services. Intermediaries in such cases are not required.|
|DeFi Features||Users can make online money transfers around the world, take loans, work with investments, trade tokens, take part in lotteries, make purchases, and purchase insurance.|
|Easy fiat currency exchange||DeFi has stablecoins. The rate is tied to real currencies. The exchange is carried out at the rate of 1:1.|
|Its privacy||DeFi users are not required to share their data with third parties. The investigations are carried out on the rights of complete anonymity.|
|NoNeed For Intermediaries||DeFi proposes to completely get rid of intermediaries. All trades and transactions take place between two parties.|
Benefits of DeFi
The popularity of DeFi among traders and ordinary users of cryptocurrencies is very high. The trend of high growth in demand for DeFi is explained by the presence of the following advantages:
- Accessibility. Each user from anywhere in the world can connect to this ecosystem and use its services and tools. The main conditions for work are access to the Internet and understanding the features of cryptocurrencies.
- There are no intermediaries. User interaction is direct. Transactions are carried out based on smart contracts.
- Smart contracts act as a guarantor. The smart contract terms are set by default and cannot be changed. The contract is strictly executed based on the specified features without any exceptions.
- Ability to create a personal application for smart contracts. Users can create an application that will match the required blockchain. Smart contracts will help make financial decisions on the most favorable terms for the user.
- Privacy. Connection to the decentralized finance application is based on the blockchain wallet number. The user does not need to provide personal or contact details. Users remain in the system incognito.
These are the main advantages of DeFi. These characteristics explain the popularity of decentralized finance in the modern world.
Risks of DeFi
Decentralized finance has many benefits. But users should be aware of the possible risks:
- Hackers. The presence of a bug or vulnerability in a smart code makes it a target for hackers. Hackers can break into such smart codes and take possession of other people’s funds.
- Fraud. DeFi is a fairly new financial market system. The level of users’ financial literacy has not reached the required indicator, which would provide protection against the provision of low-quality services. Users may come across fake investment projects, and exchanges, the purpose of which is to swindle your money.
Additional caution and learning about the details of how decentralized finance works will allow users to avoid mistakes and troubles. Users will only benefit from using DeFi.