DeFi, or decentralized finance, in recent years, is like a “boom” around the world. Even outsiders of the financial sector take part in this race. So, what makes DeFi become so attractive? What is DeFi? How does DeFi work? What are benefits of DeFi?
What Is DeFi?
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers. The system excludes banks and other financial institutions which take control of money, financial products, and financial services in the traditional financial market. In other words, DeFi uses emerging technology to remove third parties, or intermediaries, in financial transactions.
To enable the development of applications, the components of DeFi consist of stablecoins, software, and hardware. The infrastructure for DeFi and its policies are still not mature and controversial.
How Does DeFi Work?
Decentralized finance uses the blockchain technology, which is a distributed and secured database or ledger. Applications called dApps handle transactions and run the blockchain.
In the blockchain, all transactions are recorded in blocks, and then verified by users. If these verifiers agree on a transaction, the block is closed and encrypted; another block is created that has information about the previous block within it.
The blocks are "chained" together through the information in each proceeding block, that’s why it is called “blockchain”. Information in previous blocks is impossible to be changed without affecting the next blocks, so there is no way to alter a blockchain. This concept, combined with other security protocols, provides the security of a blockchain.
DeFi Financial Products
The core premise behind DeFi is peer-to-peer (P2P) financial transactions. A P2P DeFi transaction is the place where two parties agree on cryptocurrency exchange for products or services without any intermediaries.
To completely comprehend this, imagine how you obtain a loan in the traditional centralized finance. You have to apply at your bank or another financial institution. If accepted, you would pay interest and service charges in exchange for the right to use that lender's services.
In DeFi, you'd use your decentralized finance application (dApp) to enter your loan needs, and an algorithm would match you up with peers that meet your needs. Then, you just need to accept one of the terms of the lender and receive your loan.
The transaction is exactly recorded in the blockchain. You then receive the loan after the consensus mechanism verifies it. Then, the lender collects payments from you at the agreed-upon intervals. When you make a payment via your dApp, it has the same process in the blockchain; then, the money is transferred to the lender.
DeFi Currency
DeFi is designed to utilize cryptocurrency for transactions. The technology is still on the way to maturity. Therefore, precisely determining how existing cryptocurrencies will be implemented is quite hard. Stablecoin, a cryptocurrency backed by an organization or tied to fiat money, such as the dollar, is at the center of the concept.
What Are Benefits Of DeFi?
Here are some key advantages of DeFi:
- You do not have to pay the fees that banks and other financial institutions usually charge for using their services.
- You keep and control your money in a secure digital wallet instead of having a bank do it for you.
- An internet connection allows anyone to use DeFi without needing approval.
- You can carry out transactions in seconds and minutes.
Final thought
DeFi is an exciting, dynamic area of finance, which can accelerate your business to the globe. Continue your DeFi development path with GCT Solution, and let us make your process faster, more efficient and effective.
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