The financial industry is in a state of disruption. The rise in popularity of decentralized applications has disrupted the global market with a groundbreaking approach to finance, and this article will cover why DeFi is so unique and what makes it such an attractive investment option for crypto traders.
DeFi refers to decentralized financial products that remove middlemen from financial transactions, therefore allowing users to interact peer-to-peer. Two types of financial agreements are typically made using DeFi platforms: loans and investments.
Let’s examine these two components in greater detail, the projects that are already disrupting global finance, and how they work on a technical level.
Table of Contents
Smart Contracts Make Decentralized Finance Possible
The innovation of blockchain has led to an increase in online gambling and finance. This is because the decentralized system blockchain uses, called a distributed ledger technology (DLT), ensures that all users have access to their information, no matter where they are physically located.
How does this work? To explain it simply, think of a ledger as a single piece of paper that you and every other user share. When one person wants to edit their data, they can do so by writing on the same paper everyone else has access to. Anyone is free to look at the page where this transaction has happened or somewhere else in the book.
This form of decentralization makes blockchain-based applications like financial ones extremely secure, as no users can edit the ledger without having to gain access to all other users’ information.
The combination of smart contracts and blockchain technology has allowed for the creation of decentralized finance (DeFi). A smart contract is a self-executing algorithm that facilitates peer-to-peer agreements between two parties. It automatically carries out the terms of an agreement and does not require a third party to facilitate it.
What is DeFi?
The increased popularity of decentralized applications has led to a surge in peer-to-peer alternatives to traditional finance, such as the stock market and banking systems. Most people have embraced crypto trading on Bitcoin Evolution, thanks to this innovation. These decentralized financial products (DeF) are called decentralized finance (DeFi).
The two main types of financial agreements made through DeFi are loans and investments. Loans allow users to borrow money from one another, while investments allow various types of assets, such as cryptocurrency or fiat currency, to be stored in a smart contract that generates cash flow for the user automatically. As an investment tool, DeFi is already disrupting the global market.
Where Does It Fit in the Financial Sector?
DeFi is not considered a cryptocurrency nor an application, but rather it sits somewhere between the two. Some consider DeFi to be part of blockchain technology; others look at it as something that falls under finance alongside banking and stock trading, which are simply variations of DeFi.
With most people familiar with the idea of decentralization and banking, it is not difficult to understand how decentralized finance is beginning to take hold in the market. It has already given rise to innovative projects like MakerDAO, which allows users to create their own cryptocurrency pegged to fiat currencies such as US dollars and Euro, while also creating a decentralized ecosystem that allows users to pay back their debts.
Summing Up
Instead of going through centralized entities such as banks, which enforce strict regulations and have a tendency to deflate the value of currencies, DeFi is better able to protect users from any potential losses because it takes place on blockchain technology.
In short, DeFi is not yet well-understood by the general public or even financial experts, but it is already beginning to take hold. By giving people easier access to these tools while also protecting user rights, decentralized finance has become a force to be reckoned with in the financial sector.
