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What Is DeFi In Crypto?

Expand your knowledge of Decentralized Finance (DeFi) in this article!
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What does DeFi mean?

Decentralized Finance (DeFi) is a system that makes it possible for financial products to appear in public blockchain networks that are accessible to anyone (usually Ethereum), which aren’t controlled or regulated by any specific financial entity, like banks, stock markets, etc.

Unlike Centralized Finance (CeFi), in which every crypto trading made is handled through a central exchange, in DeFi there aren’t any crypto exchanges involved.

Central entities suffer from a number of disadvantages that make them very unreliable. There is the likelihood of mismanagement happening using CeFi, such as fraud and corruption within the organizations that monitor and regulate currencies.

Why is DeFi important and relevant?

In order for a decentralized system to work, it needs to have a decentralized infrastructure. The purpose of DeFi is to use technology in order to get rid of any intermediaries that are engaged in a financial transaction.

It is important to remember that any form of cryptocurrency can be labeled and classified as DeFi as all cryptocurrencies are decentralized currencies. The main idea with DeFi is to allow people to have full control of their assets.

This is truly the key aspect to remember when we talk about DeFi. This is not giving you “more” control of your assets, it gives you total control. That is the number one reason why DeFi is so important and why so many people all over the world are getting involved in decentralized finance.

One could also debate that this level of freedom is something that can be a double-edged sword in terms of how much it could make its way into the mainstream. The importance of DeFi is also a factor that could work against it in the future.

 

Examples of where DeFi is used

DEX

DEX or decentralized exchanges, allow people to buy and sell cryptocurrencies by making use of algorithms and smart contracts in order to allow the two parties involved to benefit without the need for a third party or intermediary being involved.

Lending

This is a system that allows cryptocurrency owners to lend their currencies to others and earn interest without having to pay any intermediary fees. This is a way to lend money without any middleman involved. The biggest differences between DeFi and lending and traditional lending include a more transparent and secure transaction, with more benefits for both lenders and borrowers.

Staking

Staking is the way in which cryptocurrency owners decide to contribute to the enhancement of a blockchain network. This is usually going to involve some kind of incentive, but it also comes with some risks. There are many things to take into consideration and they would require an article that is exclusively related to this particular activity.

NFTs

NFT stands for Non-Fungible Tokens and they are meant to help people define asset ownership. This means that each one of these tokens represents a specific asset owned by a specific person. With non-fungible tokens, you are not able to split the token into several parts. The NFT will contain very important information regarding the owner and seller or any asset. This of course involves blockchain technology to ensure authenticity.

What are the Benefits of using DeFi?

  • DeFi is a very transparent set of financial applications that allow people to cut the intermediaries out of the process.
  • The complex algorithms and cryptographic advantages of blockchain technology allow for verification of the authenticity of each transaction to be extremely reliable.
  • The level of flexibility and security is unmatched and this allows people to achieve optimal results from their efforts, all while having the peace of mind they do not get from centralized transactions.
  • The permissionless features of DeFi provide another key aspect that makes it extremely reliable.
  • The simple fact that you are not monitored or regulated by any financial entity gives DeFi a level of freedom that is unmatched.

What are the downsides of using DeFi?

The lack of scalability due to the extended conformation timeframes for transactions is one of the biggest concerts. This is combined with the possibility of those transactions becoming extremely expensive.

You also have the uncertainty that seems to loom over the completely decentralized currency phenomenon. There are experts that say that this type of decentralized finance is very unstable, while others wear on it becoming the next big thing that will dominate the financial landscape worldwide. This is an ongoing debate that has flooded many financial forums and social media groups, but there is no way of knowing which way the pendulum will sway in the coming years.

Last but not least, liquidity is also playing a major role in the concerns of those who want to get involved in DeFi. The DeFi market is just not big enough to come close to traditional systems and this is a concern for many who are considering the thought of jumping into DeFi.

Final thoughts

There is no question that DeFi is becoming very popular for those who are already involved in the world of cryptocurrency. It is very important to understand that only time will tell just how decentralized finance is going to grow, but those who stick around will be the ones who benefit the most if it does indeed reach mainstream levels.

There is always a level of risk involved in anything that offers significant benefits, so it’s always important to consider this in order to be able to jump into the world of decentralized finance. Don’t forget that getting involved in centralized exchanges is also a very risky decision, but many have managed to gain significant wealth from this process.

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