DeFi basics: what newcomers need to know
DeFi stands for decentralized finance, which includes cryptocurrency or blockchain applications aimed at unsettling financial intermediaries.
DeFi does not have a single regulator, built from blockchain technology, that runs the Bitcoin currency. Instead, a network of computers records transactions and is not monopolized by a single source. This feature is key because centralized systems with transactions are limited. Users also find they have less direct control with centralized systems.
Bitcoin and other cryptocurrencies contrast with legacy digital payment methods because there is no middleman in the transactions. For example, when you pay for gasoline with a credit card, there is a company standing between you and the gas station that controls whether to let you continue or stop the transaction and record it in its private ledger. This feature has been removed from Bitcoin.
In addition to direct purchases, large companies also control financial applications such as insurance, loans, derivatives, crowdfunding, betting and more. Through DeFi, all transactions cut out the middlemen.
Before it was popularly called decentralized finance, DeFi was caressed by the name of accessible finance.
“DeFi” applications, which are so named, are tied on Ethereum. It is unique to the Bitcoin platform because of the ease with which other decentralized applications can be built beyond simple transactions.
Ethereum creates and implements smart contracts that automatically execute transactions if various conditions are met. These contracts are flexible and make the platform attractive to users.
A specific scenario is that a user wants to send his money to a family member next Thursday if the temperature is warmer than 92 degrees Fahrenheit, according to weather.com. This can be applied to a smart contract.
Numerous DeFi applications run on Ethereum. Ethereum will launch an upgraded Ethereum 2.0, which could give these applications a boost.
To invest in the promising future of Ethereum and a wide range of other cryptocurrencies, always rely on a platform or service that is highly recommended by cryptocurrency experts.
Lending platforms are one of the famous DeFi types that connect borrowers with cryptocurrency lenders. Relationship is one of the lending platforms that allows users to offer loans or borrow cryptocurrency coins. Users can earn by adding interest when they lend their money. Interest rates are set algorithmically, meaning that the higher the demand for cryptocurrency loans, the higher the interest rate.
DeFi loans are based on collateral, and users must provide collateral to apply for a loan. The collateral is usually ether powered by Ethereum. Users are protected because they do not have to provide their identity or creditworthiness to apply for a loan.
Stablecoin is another type of DeFi. Cryptocurrency prices fluctuate, and this feature is not suitable for people who want to predict the value of their money a week from now – stablecoins base cryptocurrencies on fiat to ensure price stability.
Predictive Markets is one of the earliest DeFi applications running on Ethereum. It works when users bet on the outcome of an event, such as a national election. The user’s goal is to make a profit. Predictive markets are more likely to outperform polls. Intrade and PredictIt are two centralized predictive markets that perform well. Predictive markets will have more potential if they are run by DeFi, as they are often stopped by governments when they are regulated.
DeFi applications attract a large number of people. However, DeFi’s move into the mainstream depends on whether people find them helpful. Some believe that DeFi can attract hordes of new users by having more, including financial apps, and opening up its access to people who don’t usually have access to these platforms.
It is true that this new financial technology is experimental and not without problems. Its developers should solve these problems by sharding or splitting the database into smaller parts for easier management. This article serves only as a source of information about DeFi, not as financial advice.