Definition
DeFi, short for decentralized finance , is an inclusive term for peer-to-peer financial services on public blockchains, primarily Ethereum.
DeFi (or “decentralized finance”) is an inclusive term for financial services on public blockchains, primarily Ethereum. With DeFi, you can take advantage of many of the services supported by banks, such as earning interest, using loans, lending, purchasing insurance, derivatives swapping, and asset swapping. Plus, it's faster and there's no need to deal with paperwork or work with third parties. DeFi, as we are used to in crypto in general; It is global, peer-to-peer (meaning between two people directly without being routed through a centralized system), pseudonymous, and public.
Why is DeFi important?
DeFi offers an all-digital alternative to Wall Street by extending the idea of digital money, the core premise of Bitcoin. Moreover, in this alternative, there are no expenses such as offices, clearing houses, banker salaries. It has the potential to create more open, freer and fairer financial markets accessible to anyone with an internet connection.
What are the advantages?
Open : You do not need to apply or “open” an account. Simply create a wallet for access.
Use of pseudonyms: You do not need to provide your name, e-mail address or any personal information.
Flexible : You can transfer your assets anytime, anywhere without the need for permission, without waiting for long transfers and without paying high fees.
Fast : Interest rates and rewards are usually updated quickly (every 15 seconds). These rates can be significantly higher than traditional rates on Wall Street.
Transparent : Anyone involved can see all transactions (private companies rarely offer this level of transparency)
How is it working?
Users interact with DeFi through software called dapp (“decentralized application”), most of which currently run on the Ethereum blockchain. Unlike traditional banks, there is no application form to fill out or an account to open.
Here's how people interact with DeFi today:
Lending : Earn interest and rewards every minute, not once a month, by lending your crypto.
Borrowing : Get instant loans without the paperwork, including ultra-short term “flash loans” that traditional financial institutions don't offer.
Swap : Exchange specific crypto assets between peers as if you were buying and selling stocks without a middleman.
Saving for the future : Benefit from higher interest rates from banks by investing some of your crypto in savings account alternatives.
Buying derivatives : Play on certain assets long or short term. You can think of it as a cryptocurrency version of stock options or futures contracts.
What are the disadvantages?
The fluctuating transaction rates on the Ethereum blockchain mean that actively trading in exchanges can be expensive.
Depending on which dapp and how you use your investment may experience high volatility. After all, this is a new technology.
You must keep your own records for taxation. Regulations may vary from region to region.
