What is Decentralized Finance? | Understanding DeFi
Understanding DeFi
If you have been in the cryptocurrency space for a little while, you're probably familiar or at least have heard of decentralized finance (DeFi). If you're new to crypto or have never really looked into it much, maybe you've never even heard of DeFi. As I've stated on my previous content here, my aim is to make crypto content that is easy to understand for people that have never heard of it. Also a refresher is never a bad thing. I'm no expert, I'm just a guy that likes to experiment with crypto and NFTs so if I get something incorrect, please correct me in the comments.
So I think the easiest way to explain what DeFi is, is to first look at what people think of when they think of finance. We use centralized finance every single day when you think about it. This is your traditional banking, loan services, credit cards, and everything finance related that is controlled by a central party. In traditional finance, the regulators and powers that be decide what you can do with your money.
Imagine being able to do all of that stuff, plus a lot more without anyone being able to stop you. Without anyone controlling the system or your money.
With crypto, we're not only in control of our money but we're also in control of what we do with our money. Since crypto is programmable money that's not controlled by one centralized party, it can be programmed to do all kinds of things. Literally anyone is able to write code to create programs and applications (known as decentralized applications or "dapps") that anyone is able to use their wallet to interact with.
People have created all kinds of dapps that allow us to connect our wallets and interact with them with no middle man. Things like decentralized exchanges (known as DEX's) are the perfect example of this. With decentralized exchanges, you don't need to create an account with a username or try to remember a password - instead you just connect your wallet.
One you've connected your wallet to a DEX, you're able to do different things like swapping one crypto for another like BNB and CUB tokens. There's no middle man collecting your private information or controlling what you're able to do. Some of these platforms even allow you to do things like yield farming and borrowing/lending with your assets.
The most popular thing to do with DeFi has always been yield farming. Basically what this allows you to do is take 2 assets and pair equal amounts of them together to provide liquidity for the platform. Typically this is going to pay some kind of yield depending on the platform and which assets you're pooling.
Above, you can see the different yield farming pools on PolyCUB which all pay different percentages in crypto for staking your liquidity tokens. Yield farming is just one small aspect of DeFi, though, I just wanted to highlight it because it's probably the most-talked-about aspect.
Different DeFi platforms allow you to do different things like this across different blockchains. There's even platforms that allow you to take out loans based on your assets. They will even let you lock your assets up in the platform, known as staking to lend out to other users to earn a yield. Again, these are just a few aspects of the greater thing that is DeFi.
There are some huge advantages to using these systems over traditional finance systems. One of those advantages is that these DeFi platforms run on blockchain technology, which is not only immutable, but verifiable. This eliminates things like fraud, false information, and issues like double spending. No one can stop you from depositing your Ethereum and Ethereym based tokens into the platform to trade between different assets. No one can freeze your account or deny you service.
If it were entirely possible to not use the traditional financial systems at all, I'd be all about it. Unfortunately, crypto is very new and it is not recognized as legal tender (except in countries like El Salvador). This means that until we have a way to exclusively use cryptocurrencies, we are going to have to rely on the traditional system at least a little bit.
DeFi is the financial system of the future. Bringing the true power of programmable money to the hands of literally anyone with a smartphone or computer. It is the most inclusive financial system that exists that literally knows no bounds. Centralized systems will always exist, but I absolutely cannot wait for the day that we're able to completely opt out from using them.
Post written by: @l337m45732 aka NiftyPhill.
Posted Using LeoFinance Beta
