The financial system of the future will be based on decentralized finance. Why is it even possible to say it that way? Indeed, what kind of power does it have against the centralized financial system that already exists? Do we really need to improve upon the tried-and-true methods of banking?
This is a question for those of you who are just starting out in the world of cryptocurrencies, as well as for those of you who may already be seasoned veterans in the field of cryptography.
What exactly is DeFi?
“Decentralized finance” is what “DeFi” stands for. In contrast to conventional banks, decentralized financial institutions (DeFi) do not have a single governing body that is responsible for regulating the movement of money. Since there is no single person who is in charge of managing your finances, you do not need to be concerned about anyone taking your money since they do not have the ability to do so. Using the distributed ledger technology known as blockchain, DeFi does away with the need for intermediaries in financial transactions.
How does it work?
An easy way to explain DeFi is for example, you want to buy a house with Defi, using a DeFi platform. When it’s time to pay your house with DeFi obviously the house will be automatically yours right? But here’s the catch, no middlemen were involved in your transaction, there are no central authority overseeing the transaction to a house you just made.
The main goal of DeFi is to replace centralized finance services that most banks have, such as loans, lending, derivative finance, and insurance by using decentralized technology. DeFi is built on top of three main things: Cryptography, blockchain and smart contracts.
The advantages of DeFi
Key attractions that people like about Defi:
- It is much cheaper than traditional banks. It eliminates the fees that banks or other financial companies charge for their services
- Instead of keeping your money in the bank, you hold your money in a digital wallet that is much safer.
- Everyone can use it. There are no limitations to whom it can reach.
- Your funds can be transferred in a matter of minutes, even seconds.
What’s the difference between DeFi Tokens and Coins?
Even though they are quite similar, there are important differences betweetn DeFi
tokens and coins that you should probably know about
DeFi Coins
A DeFi coin is much similar to a digital version of fiat coins. DeFi coins
are built on and often named for their unique, native blockchain networks.
Maker, Compound, Uniswap, Aave, Chainlink, and Ankr are some of the most well-known DeFi coins.
DeFi Tokens
DeFi tokens convey value, but not always monetary value. Utility tokens can be used as passwords to access a resource, asset tokens can represent tangible assets like as real estate, and non-fungible tokens (NFTs) represent unique “things” such as digital art. Coins and DeFi tokens are also different because DeFi tokens can be built on top of existing blockchain networks.
What does the future look like for DeFi
Decentralized finance is still in the beginning stages of development, it is still unregulated so it is not immune to infrastructural mishaps, hacks or scams. Many questions are still left unanswered. So there is still a long way to go to a fully decentralized financial system.
