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DeFi (Decentralized Finance) is an open global financial system designed for the internet age. It’s an alternative to a tightly controlled opaque system maintained by decades-old infrastructure and processes. It gives you control and visibility over your money. It gives you exposure to global markets and alternatives to your local currency or banking options.
DeFi (Decentralized Finance) is a collective term for financial products and services accessible to anyone who can use Ethereum. The services that were previously slow and at risk of human error are automatic and safer that are managed by the code that everyone can inspect and consider.
With DeFi you can do most of the things that banks support, earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more. But it’s faster and doesn’t require paperwork or a third party.
Why is DeFi important?
DeFi takes the basic premise of Bitcoin – digital money – and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs. This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.
What are the benefits?
- Open: You don’t need to apply for anything or open an account. You just get access by creating a wallet.
- Pseudonymous: You don’t need to provide your name, email address, or any personal information.
- Flexible: You can move your assets anywhere at any time, without asking for permission, waiting for long transfers to finish, and paying expensive fees.
- Fast: Interest Rates and rewards often update rapidly (every 15 seconds), and can be significantly higher than traditional Wall Street.
- Transparent: Everyone involved can see the full set of transactions (private corporations rarely grant that kind of transparency).
How does it work?
Users generally engage with DeFi via the software called DAPPS (Decentralized Application), most of which are currently performed on the Ethereum Blockchain.
Ways How people are engaging with DeFi
- Lending: Lend out your crypto and earn interest and rewards every minute – not once per month.
- Getting a loan: Obtain a loan instantly without filling in paperwork, including extremely short-term “flash loans” that traditional financial institutions don’t offer.
- Trading: Make peer-to-peer trades of certain crypto assets – as if you could buy and sell stocks without any kind of brokerage.
- Saving for the future: Put some of your crypto into savings account alternatives and earn better interest rates than you’d typically get from a bank.
- Buying derivatives: Make long or short bets on certain assets. Think of these as the crypto version of stock options or futures contracts.
DeFi is an open-source movement. The DeFi protocols and applications are all open for you to inspect, fork, and innovate on. Because of this layered stack (they all share the same base blockchain and assets), protocols can be mixed and matched to unlock unique combo opportunities.
What are the downsides?
- Fluctuating transaction rates on the Ethereum blockchain mean active trading can be expensive.
- Depending on the uses of DAPPS and how you use them, your investment can undergo high volatility. It is after all the new technology.
- You have to maintain your own records for tax purposes. Regulations can vary from region to region.