What is Decentralized Finance (DeFi)?
Updated: Jun 2, 2022
What is Defi?
Decentralized Finance, more commonly known as DeFi in the blockchain industry, is a rapidly growing ecosystem of financial services and apps that exercise peer-to-peer transactions instead of relying on a central authority.
Let’s unpack that here:
1. It’s a protocol for financial services and apps
DeFi is a system built on the blockchain that provides the same services of traditional financial institutions, but better. We’ll explain in a bit.
2. It exercises peer-to-peer transactions
DeFi transactions can be carried out without the middleman or you can directly transact with another individual or entity over the blockchain with an internet connection
Typically, the transactions are bound as smart contracts or code added on the blockchain, which cannot be altered or deleted.
What are the known benefits of DeFi?
While the concept of DeFi started at arguably the same as Bitcoin, the services and applications have only been gaining traction in recent years.
Here are the known benefits of decentralized finance to start:
Financial services for anyone, anywhere
One of the main benefits of DeFi is the low entry barrier to access the services. There are people who may not have the ability to fulfill bank requirements, such as the unbanked and underbanked. DeFi makes it all possible.
Better transparency and security
But those requirements are legal necessities to avoid security risks you say? DeFi is built on the blockchain, which is open-source, meaning anyone can check the code. It is encrypted but fully transparent and even more secure than its counterpart — centralized finance — which is known to be penetrable to hacks.
No single point of authority or control
One of the many downsides of banks and other traditional forms of financial institutions is bureaucracy. DeFi does not rely on one central authority or figure that controls the laws or rules governing the services. Therefore, you can access any of the services without bias or delay.
Services are available 24/7
Given the largely unmanned nature of DeFi services, it can provide round-the-clock services. With an internet connection, two people can transact at any time and anywhere.
Fewer human-related errors
Obtaining a loan from the bank involves several steps, and sometimes with the participation of a partner institution. With the middleman out of the picture in DeFi, there is little room for human-related errors.
Smaller fees
An additional benefit of taking out the middleman is also taking out the huge fees and/or commissions that plague traditional services.
Current real-life uses
DeFi can be in the form of decentralized apps (dApps) or financial services, and exchange platforms, among other things. Here are some of the more popular uses of DeFi today:
Loans Blockchain-based digital banks rose to the challenge of borrowing and lending cryptocurrencies and other digital tokens to a growing customer base.
Decentralized trading There are those like the Uniswap protocol that provides decentralized trading where transactions are done via peer-to-peer trading or between two individuals or entities. For comparison, a centralized exchange has the power to choose which tokens can be traded and when.
Staking Many who are new to cryptocurrencies start off with staking. It’s a program that allows you to lend your coins or tokens to validate blocks, which are encrypted transactions, on the blockchain network. It sounds technical, but it’s very low maintenance and usually just a matter of hitting a “subscribe” button and letting it do its magic.
Yield farming Yield farming requires some form of an investment strategy but rewards you all the same. You are required to deposit your cryptocurrency to a DeFi platform and you are rewarded based on the mechanics of the liquidity pool.
AlgoBlocks makes your entry into the DeFi space easy
DeFi is easy enough to grasp as a concept, but the multitude of investment options may be overwhelming for beginners. AlgoBlocks is a decentralized finance platform that solves major issues with your entry to the DeFi space.
Get access to a wide array of DeFi products to jumpstart your investment and manage your assets in one user-friendly place. AlgoBlocks even allows you to execute convenient combo actions in just a few clicks.
One of the most promising benefits of AlgoBlocks are the investment templates that you can use to start your journey even without technical knowledge. Learn more about AlgoBlocks About AlgoBlocks
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