What is Decentralized Finance (DeFi)? — AutoTrading Strategies
Decentralized finance or defi has been around since the inception of blockchain technology. It is a combination of smart contracts, decentralized applications (dApps), and protocols. These are built on bitcoin or ethereum blockchain. Defi provides an open and inclusive financial system. It has the potential to disrupt the traditional banking system.
How DeFi is different:
In the traditional financial system, we make transactions through currency. Central banks are responsible for the issuance of currency. This system is centralized on its core. Central authorities or governments have control over the supply of currency. We trust them that they won’t devalue it by printing large amounts overnight. However, they hold the power to do so. In many countries, economies collapsed by poor management of currency by governments. Therefore, defi presents an alternative in which we don’t have to depend on our governments.
The Defi system is decentralized. Essentially, this means that there is no one person or authority has the power. Individuals can verify each and every transaction. There is a minimal need for trust. Additionally, it provides all the financial services i.e savings, insurance, loans, trading, money exchange, and others. In conclusion, defi is a complete package without the downsides of the traditional system. Below we have listed some of the coolest defi features for you:
Open to all:
Defi is globally open to all. Anyone with a smartphone and internet connection can conveniently access it. The rules are also the same for everyone. Although, some countries may apply local restrictions (because governments fear complete decentralization). Rules in defi are in the form of code or smart contracts. Once a developer deploys the code, dApps can automatically start running. It requires little to no help from humans. For example, you can create an application on Ethereum that can issue, store, and manage digital assets. Subsequently, those functions will run on their own. However, you can occasionally go to fix the bugs or any other issue that may arise.
Everything from codes to transaction is transparent on defi. Users can audit, check, and verify different functions. It also gives them the opportunity to fix problems in the code. Transactions recorded contain digital signatures of users instead of their real names for privacy reasons.
There is no need for permission to build or use a defi app. As mentioned earlier, it is open to all. Anyone with development knowledge can deploy a smart contract on the decentralized ledger. Users can access it with their crypto wallets on a daily basis. This permissionless system is something unheard of in the traditional financial system.
Defi is flexible to the core. You can build your own interface on it. Moreover, it gives the option of third party platform integration. In short, it is adjustable according to your needs and wants.
Compatibility is another feature of the defi ecosystem. It allows users to utilize as many services as they want. For instance, you can seamlessly use decentralized exchanges, stablecoins, and wallets at the same time. More and more developers can enter the system and stack their products without causing any loss of data for previous users.
Defi is still in its early years. Its journey, up till this point, hasn’t been smooth altogether. Like other computer programs, DApps have been exposed to hacks and bugs. However, this has been the case with all sorts of technology at the start. Nevertheless, defi is progressing fastly in the crypto world against all odds. We are witnessing the provision of all sorts of financial services for crypto users. The new innovations may likely open ways for it as well. The future is bright for defi. So, you should too experience the magic.
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Originally published at https://autotradingstrategies.com on August 5, 2020.