DeFi is an acronym for decentralized finance, and it is a general term for peer-to-peer financial services on public blockchains (mainly Bitcoin and Ethereum).
DeFi stands for “Decentralized Finance”, also known as “Open Finance” [1] . It is a combination of cryptocurrencies represented by Bitcoin and Ethereum, blockchain and smart contracts. With DeFi, you can do most of the things that banks support — earn interest, borrow money, buy insurance, trade derivatives, trade assets, and more — and do so much faster and without paperwork or third parties. Like cryptocurrencies in general, DeFi is global, peer-to-peer (meaning directly between two people, rather than being routed through a centralized system), pseudonymous, and open to all.
The usefulness of DeFi is as follows:
1. To meet the needs of some specific groups, so as to play the same role as traditional finance.
The key to DeFi being needed is that in real life there are always people who want to control their own assets and financial services. Because DeFi is intermediary-free, permissionless and transparent, it can fully satisfy the desire of these groups to control their own assets.
2. Give full play to the service role of fund custody, thus becoming a supplement to traditional finance.
In the currency circle, there are often situations where exchanges and wallets run away, or money and coins disappear. The fundamental reason is that the currency circle lacks fund custody services, but at present, few traditional banks are willing to do it or dare to provide it. Therefore, the DeFi hosting business in the form of DAO can be explored and developed, and then become a useful supplement to traditional finance.
3. The world of DeFi and the real world exist independently.
DeFi does not require any guarantees or provide any information. At the same time, users’ loans and mortgages in DeFi will not have any impact on the credit of users in the real world, including housing loans and consumer loans.
what is the benefit?
Open: You don’t need to apply for anything or “open” an account. You just need to create a wallet to access it.
Anonymity: Both parties using DeFi transactions (borrowing and lending) can directly conclude a transaction, and all contracts and transaction details are recorded on the blockchain (on-chain), and this information is difficult to be perceived or discovered by a third party.
Flexible: You can move your assets anytime, anywhere without asking for permission, waiting for long transfers to complete, and paying expensive fees.
Fast: Rates and rewards update frequently and quickly (as fast as every 15 seconds), low setup costs and turnaround time.
Transparency: Everyone involved can see the full set of transactions (this kind of transparency is rarely offered by private companies), and no third party can stop the lending process.
How does it work?
Users typically participate in DeFi through software called dapps (“decentralized applications”), most of which currently run on the Ethereum blockchain. Unlike traditional banks, there are no applications to fill out or accounts to open.
What are the disadvantages?
Fluctuating transaction rates on the Ethereum blockchain mean that active transactions can become expensive.
Depending on which dapp you use and how you use it, your investment may experience high volatility – this is new technology after all.
For tax purposes, you must keep your own records. Regulations may vary by region.
Post time: Nov-19-2022