The finance sector is one of the most sensitive and critical sectors of our time. With increasing numbers of individuals shifting their financial records from paper to digital Finance is constantly seeking out efficient and secure technologies which can be used to simplify processes and improve the security of its customers.
Inspired by the blockchain tech Decentralized finance, also commonly referred to as DeFi is a brand new method to manage finances in a non-centralized way and completely eliminate intermediaries from the process. It is seeing popularity due to its advantages and capabilities. As per DeFi Pulse, the total value that was locked into DeFi was about USD 679 million at the close of 2019. However, today, the total value locked into DeFi amounts to USD 12.45 Billion.
What exactly is DeFi?
DeFi is a term used to describe Decentralized Finance. It is a kind of finance that seeks to the elimination of intermediaries and establishing an economic ecosystem that is:
- Transparent
- open source
- Permissionless
- Not centralized
The decentralized financial system operates independently of a central authority meaning that it’s open to anyone. This means that people are able to:
- Completely manage their assets
- Conduct peer-to-peer transactions and exchanges
- Create and use decentralized applications (dApps)
By eliminating financial intermediaries such as banks, exchanges, and brokerage firms, DeFi uses blockchain technology to help finance. With DeFi users can:
- Each borrows money from the other
- trade cryptocurrencies
- insure against risks
- High interest rates can be earned
- Price speculation on assets
By using decentralized finance, individuals have many advantages. To better understand it we need to know what is the difference between it and centralized finance (CeFi).
What is the difference between CeFi and DeFi?
CeFi stands for central finance. Like the name implies, CeFi is a central financial structure.
There are many distinctions between CeFi and DeFi. To comprehend the differences better Let’s talk about them thoroughly.
The main distinction between CeFi and DeFi is evident from their terms. The DeFi network is decentralized while CeFi has a centralized. DeFi is a non-permissionless network and CeFi is an authorized network. In CeFi, certain actions can only be executed by authorized individuals, while in DeFi there is no central authorities.
DeFi is an open-source software and, therefore, promotes collaboration that is free. CeFi isn’t an open source software, which means that collaboration between users isn’t supported and the decisions are made by designated people. As DeFi is open-source, it is also censorship-resistant, whereas CeFi can be censored.
DeFi is more affordable contrasted to CeFi due to the fact that the majority of costs are network-related. But CeFi can be expensive since intermediaries are charged hefty charges.
Defi is based on blockchain technology, while CeFi operates with conventional techniques.
Decentralized finance shifts the flow of transactions from traditional , centralized financial systems to P2P financing supported by decentralized technology built on blockchains, such as Ethereum as well as Stellar. Centralized finance involves many institutional and central government authorities and intermediaries. DeFi seeks to eliminate them by using smart contracts.
Due to the many promising advantages that it has it has been one of the most popular sectors of the blockchain market with a myriad of use cases and a total value locked of USD 12 billion. Let’s look at the advantages.
What are the benefits of DeFi?
- Immutability
Immutability is “not subject to changes.” Since the decentralized finance system is based on blockchain technology, the data is unchangeable, which means that it can’t be altered. Because the data is impervious to manipulation that makes financial procedures as well as operations extremely secure and easily auditable.
- Transparency
DeFi is transparent. Since it is based using blockchain technology that is, all data, transactions and codes stored that are stored on the blockchain are accessible to all. A level of transparency like this can builds trust among the userssince everyone on the network has the ability to:
know what type of transactions are being conducted.
Learn about and appreciate the code of the smart contract as well as its capabilities.
Therefore, transparency is a guarantee:
- high levels of trust
- Security
- Auditability
- authenticity
- Interoperability
Through decentralized finance developers are able to freely:
- built on top of existing protocols
- Modify interfaces
- incorporate applications from third parties
Due to this adaptability DeFi protocols are frequently called “Money Legos.” Decentralized financial applications are created by combining DeFi products. For instance, Stablecoins, decentralized exchanges, as well as prediction markets are able to be combined to create entirely new and far more advanced marketplaces.
Read More : https://www.leewayhertz.com/decentralized-finance-defi/
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