DeFi is short for decentralized finance, and this is an umbrella term for financial services that operate on a public blockchain. A blockchain refers to an interconnected layered network for the exchange of digital currencies decentralized data. This network powers autonomous and untraceable transactions between two parties.
Every transaction that you make on the blockchain follows a randomized path in which the data travels across hundreds of different electronic devices before reaching the recipient. The primary blockchain that powers most financial operations in the crypto space today is the Ethereum blockchain.
What is DeFi?
With DeFi or decentralized finance, users can do most of the things that bank’s support. Users can borrow land, earn interest, trade, and carry out other financial operations using decentralized finance. Overall, DeFi is not so different to traditional market in terms of financial operations. However, when drawing a contrast between decentralized finance and the conventional centralized finance, many differences can emerge.
DeFi vs CeFi
Decentralized finance in comparison to centralized finance is much faster. Moreover, it does not require users to fill out any paperwork and documentation before any financial procedures. These aspects of DeFi make it a more convenient option against centralized finance. Transactions in a decentralized finance settings are peer-to-peer, and do not require a third party that conducts to overlook and supervise.
The lack of a governing third party is the key difference of decentralized finance, and this is also what contributes to this system being faster, and cheaper. Since there is no existence of a third party, user are not subject to hefty fees and documentation.
Transactions through DeFi systems are anonymous and global. It is also open to everyone that has access to the internet. Unlike centralized finance, these transactions are not overlooked by a third party and do not abide to private policies and documented legislations.
Instead, they are contractually enclosed to a particular algorithm that will function autonomously without any unexpected changes. In this transaction, the code dictates the nature of the exchange. There is an emergent need for decentralized networks and many things make this transaction important.
Why is DeFi Important?
Decentralized finance takes the premise of digital currency and then expands on it to create an entire digital alternative to financial institutions. It rids users from all the associated costs that giant financial institutions will mostly charge people for financial services.
This has the potential to help manifest a market that is open, fair and accessible to anyone that has an internet connection. It has great benefits that many users have learnt to leverage from it lucratively.
For one, decentralize finance allows users to stay anonymous. This means that you do not have to provide your name or any personal details. This allows users to protect their personal information and not become subject to control. It allows people to maintain their privacy when carrying out financial operations.
It is also very versatile as it allows users to easily transfer and receive assets anywhere. In contrast, when trying to carry out transactions across different countries using conventional means, you have to first ask for permission, pay extra fees for international transfer, fill out paperwork to provide the details of the transaction, and also wait for a long time for asset to travel to the receiving end.
DeFi or decentralized finance on the other hand is completely open and does not require any painstaking procedures before you make the asset transaction. It also does not require users to fill out paperwork or provide personal details. All you have to do is open an account and get access after making your digital wallet.
It is also very fast in contrast to conventional banking systems. Interest rates and rewards on a DeFi system will often update more rapidly than conventional banking systems and also within seconds. Therefore, decentralized finance is open, anonymous and fast, and getting involved in it will require users to use Dapps.
Dapps are interfaces and platforms that provide users with the access to the blockchain services. Most of the Dapps run on the ethereum blockchain. To get involved in these applications, you have to first set up a crypto wallet in your browser. It is best to set up a browser that supports Ethereum and can also connect to different DeFi protocols.
DeFi Trends 2022
The first type of trend emerging in the DeFi space is P2E games. This refers to the play to earn games, in which you can play to earn money. One of the popular play-to-earn games in this space is called Crabada. Games such as these are very attractive and addictive for users. When you add a monetary gain to already addictive games, the sector of P2E games will undoubtedly increase.
Another trend revolves around liquidity pools and nodes. Farming as a service is also a Defi trend that many people like. This is essentially when you purchase tokens and get paid out in reflections. The investment gets put into a treasury balance which then gets into a wallet address, which then allows lead farmers to make profit with the treasury.
Another trend that came about in this space takes shape in the form of DAO. There will be many DAOs that are transitioning this year and transition to them will be more sustainable for the users. Not to mention, there is great utility behind a DAO.
Yield farming is another DeFi trend that you should look out for. In this, users have a way of earning passive incomes simply by staking a portion of their investments as collateral. This investment acts as lenders money for people looking to borrow.
DeFi technology can single handed revolutionize the modern banking system and help users be more careful and secure with their money. Decentralized finance has multiple other use-cases instead of banking, and it can add a just and efficient system to any conventional system.