Decentralized finance or Defi is a bit of a catchy term in the world of blockchain. It is a digital financial infrastructure that eradicates the need for any central governing authority to approve transactions. The concept of Defi is interconnected to blockchain technology. Blockchain is a decentralized public ledger that records the transactions of Bitcoin and other Cryptocurrencies. The nodes have a duplicate copy of all the transactions made in the past.
The entire idea behind developing such a platform is eliminating any third-party intervention to avoid destroying or tampering with any record. As trading of Cryptocurrencies through trading software like Bitcoin Trader has gained popularity, the security of these transactions is also a matter of grave concern. All the financial services that can define Defi are found on the Ethereum network.
How Does Defi Work?
Traditionally, there was a dire need for guarantors. But, Defi uses smart contracts and Cryptocurrencies for eradicating the need for any third-party intermediary to provide financial services. Financial services like lending of Cryptocurrency, saving Cryptocurrency and earning a better rate of interest than a bank, getting a loan instantly, peer to peer trading without the intervention of a broker, buying derivatives like futures contracts and stocks are all provided by Defi.
Defi is considered open-source, where the applications and the protocols are theoretically available to the users. They can investigate and give in suggestions for better innovation. The users of these applications can mix the protocols and match them according to their will. This allows them to create their unique combination of opportunities by developing their decentralized applications.
What Can Be Done With Defi?
As stated above, Defi uses smart contracts and Cryptocurrencies to provide financial services without banks’ intervention. The most popular uses of DeFi are as follows:
- Sending money anywhere irrespective of geographical boundaries.
- Storage of money in Crypto wallets and enjoy high-interest rates compared to conventional financial institutions.
- Peer to peer borrowing and lending of Cryptocurrencies
- Trading Cryptocurrencies anytime 24/7
- Trading of derivatives like funds, stocks, Non-fungible tokens and other financial assets.
- Purchasing insurance
How To Make Money In DeFi?
Nowadays, people are scouting for more and more ways to capitalize on growth on DeFi. Generation of passive income through Ethereum based lending applications is a strategy to grow on DeFi. The users lend their money and generate a passive source of income through the interest charged on the loan amount. Yield farming is also a way to generate passive income. But, it is a bit riskier as compared to the former source. Since it lacks transparency, it can be slightly complicated for the traders.
The Bottom Line
Using DeFi can prove to be very risky. The concept of DeFi is to provide financial services by using smart contracts and Cryptocurrencies, which are built on public blockchains. A variety of applications make up DeFi. Trading, borrowing and lending are some of its financial services.