What Is Decentralized Finance? A Detailed Guide Part 1 | Beginning of the DeFi?
The finance industry is growing more towards digitalization. More companies are opting for digital platforms to store and manage data. Security is of utmost importance. So this industry is constantly looking for new technologies that will provide security and simplify how customers access Services.
Decentralized finance (DeFi) is taking the world by storm. It is becoming more popular among businesses because it removed the control that banks or other financial institutions have over money. Cyber security risks are at an all-time high, so people want to be sure that their assets are secure. Defi provides a secure wallet where customers can keep their money without worrying about losses. So what exactly is Decentralized Finance and why is it beneficial and how can you get started?
What is DeFi?
CeFi vs DeFi
The Benefits of DeFi
- It is cheaper
- Transparent transactions
- Reduced risk of loses
- Apps are immutable
What is DeFi?
Defi offers a way to manage finances in a centralized way. Customers no longer have to rely on banks before accessing services. DeFi aims to remove all intermediaries when customers are accessing financial services. The many features of Decentralized finance have contributed to its value reaching over 25 billion dollars. As Blockchain technology keeps growing, so will DeFi.
Defi uses ledgers that are similar to what is used in cryptocurrency. Some of the other benefits that customers enjoy about DeFi is the lack of fees. So customers do not have to pay any fees for using financial services as they would with banks. An additional advantage is a security it provides. With a lot of technology, the risks of making losses are high.
The benefits of decentralized finance are so many. But to get a clearer picture of just how much DeFi is an advantage, it would be helpful to understand what centralized finance is. So what is centralized finance and why is it less effective?
CeFi vs DeFi
CeFi is centralized and uses traditional banking structures. It is made up of central authorities, intermediary companies, and other financial institutions. This means that only certain individuals can authorize activities. Another difference between these two is that DeFi is an open-source service. So individuals can perform as many collaborations as needed. Centralized finance on the other hand doesn't promote collaborations between individuals. Ceci is also at risk of being censored especially if the authority doesn't allow an activity to be performed.
The Benefits of DeFi
DeFi solutions bring many benefits to the finance sector. Besides that it helps to improve transparency, reduce error handling, lower costs, bring automation, and reduced risks. With ways to expand the DeFi market, lots of projects have initiated outstanding functions and features to aid users' interaction in the decentralized finance world. Defi has several other advantages, let’s check them below.
1. It is cheaper
As mentioned earlier, one of the attractive features of DeFi is cheaper services. Customers do not have to pay intermediary fees. This reduces the overall expenses that an individual would otherwise pay for using centralized finance. To make things worse most of the expenses are a result of intermediary companies. All financial decisions are made by the central authority.
2. Transparent transactions
All transactions done on DeFi are open to all to view. This builds trust between different users. So everyone on a Blockchain can have a better idea of everything that's happening. Users also have access to all the functionalities of a smart contract. Transparency not only creates trust but also accountability and security for all users.
Developers can easily upgrade protocols on DeFi apps. It is also easy to integrate decentralized applications with third-party apps. This flexibility means new apps can be launched frequently. All you have to do is create a different combination of apps. Two apps can be combined to create a completely new product.
4. Reduced risk of loses
Data used on decentralized finance apps are stored on a Blockchain. It is stored on multiple nodes. Because data is spread through several nodes, it is impossible for censorship. This means the chances of a service stopping are reduced. Each user has complete control over their assets. Transactions are quick and automatic.
5. Apps are immutable
Data on decentralized finance apps cannot be easily changed. So it is unlikely to be tampered with. So even if one was to hack the app, it would be difficult for any changes to be made. This means that all transactions carried out in DeFi are secure. This gives users a sane platform to make financial transactions.
With DeFi, finance becomes more secure, transparent, and decentralized. There is no need to acquire permission before performing any activity. Because it Is decentralized, customers do not need to get authority. Removing a central authority also gives people the opportunity to have control over their assets.
Because there are no intermediaries, people can easily borrow from each other. It also becomes easy to trade using cryptocurrency. Companies can take more risks as there is more security against losses. Also because of the Blockchain technology that DeFi uses, customers are likely to make higher interests. It also provides flexibility. Developers can easily create new applications by combining two different apps. With DeFi, there is more freedom while expenses are less.
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