Decentralized finance also known as DeFi is a developing financial technology that is based on secure distributed ledgers that have a resemblance to those which are used by cryptocurrencies. In the USA, the Federal Reserve and Securities and Exchange Commission has defined some specific rules for centralized financial institutions including banks and brokerages which consumers and customers have access to capital and financial services directly. Decentralized finance is the opposite of this traditional system and challenges the whole system by allowing the user to have peer-to-peer digital exchange without any interruption. One of the best features of DeFi is that it totally eliminates the fee or any other charges that banks and other financial institutes demand to provide their services. With decentralized finance, people have the freedom to hold money in a digital wallet and can transfer money within minutes. Anyone having internet can use DeFi.
The Difference between Centralized and Decentralized Finance
As mentioned above, decentralized finance is different from centralized finance banks. In traditional or centralized finance, banks and third parties hold the money to facilitate the transfer between two parties, and they charge a sum of money for using their services. The charge of a credit card is started by the merchant and then it is moved to acquiring bank which processes the detail and forwards it to the network of the credit card. This process clears the charge from the bank and requests the bank for payment. In this whole process, each and every entity in the chain receives payment for the service.
However, in decentralized finance, there is no involvement of any third party, and it allows people to transfer money directly with the help of the latest technology. For peer-to-peer financial networks, DeFi makes use of security protocols, software, connectivity, and many other things to ensure safety.
The next thing that comes to mind is how does DeFi work? It uses block chain technology that is distributed and a secured database. The applications which are used for transactions and to handle block chains are called dApps. In the system of block chains, the transactions are first recorded in the blocks, and then it is verified by users. If the verifier agrees on the transaction, the block is sealed and encrypted, and instantly another block is created which bears all the information of the previous block. All these blocks are chained together through a piece of information in a specific order and hence called the block chain.
One of the core premises behind DeFi P2P financial transactions. It is a good place where parties agree to the transfer of goods and other services without the involvement of a third party. Anyone with a stable internet connection can use DeFi as there are no geographical restrictions. On DeFi, there are fewer fees and high interest rates, there is a fee because the lender can be anywhere in the world. DeFi is an extremely safe platform for everyone because block chains cannot be broken by any means. DeFi is good for generating income.
