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What is DeFi? Discover How It Works – 2022

Table of Contents

DeFi, or decentralized finance is an emerging segment of the fintech space. It is a new way to invest in crypto assets. The traditional avenue for investing in crypto assets has been through centralized exchanges like Coinbase, but this does not offer enough security and accessibility to meet the needs of investors. DeFi offers both security and accessibility by removing the middleman from the investment equation.

How does DeFi it work?

DeFi is short for decentralized finance and describes a new type of financial system that uses smart contracts to link individuals who want to borrow and lend money with each other. It is an alternative form of lending and borrowing that cuts out the middlemen, such as banks. This way, borrowers can get their loans at a lower interest rate than traditional banks and lend their excess cash to others at a higher return than traditional banks.

For example, if you want to borrow $100, you can send your $100 to a lending pool, and the lending pool will assign a value (or price) to your $100 based on your credit history and risk. People with good credit history and stable incomes will have a high enough chance of receiving a loan that the risk is worth it. The lending pool will be able to lend the money to people with a low credit score or less stable income. Lending pools are a great way to create a social banking system. Social banking allows you to lend your money to people who need it the most.

Why Does Decentralized Finance Exist?

DeFi is a new movement in the crypto space that has been attempting to address some of the issues around blockchain infrastructure. One of the biggest problems facing the cryptocurrency market right now is scalability, which means that it takes too long for transactions to process. The other issue is interoperability, meaning it’s not yet possible for users to move from one blockchain to another without having to cash out and then cash back in again. DeFi addresses both of these issues.

Interoperability is also known as cross-chain connectivity or interchain connectivity, which is important in the DeFi space because it allows users to transfer assets across different blockchains. The goal of interoperability is to allow for the seamless, frictionless and user-friendly movement of tokens and coins from one smart contract to another.

Benefits of decentralized finance

1. It’s the future

What is DeFi?

DeFi is a very promising use case for blockchain. It’s not only for cryptocurrencies as these are just a fraction of the applications. The other applications include lending, borrowing, payments and more. Because of blockchain’s ability to keep a record of transactions, the transaction fees are generally less which in turn reduces the costs for users.

2. Security

What is DeFi?

Another important thing about blockchain technology is its ability to protect the data from hackers. Unlike banks which have centralized servers which are vulnerable to hacking attacks, blockchain is decentralized. Hackers and cybercriminals will have to hack into every node in the network to hack into your account. This means that if the attacker has to hack more than four nodes, they will be unable to access your information. This is the reason why banks and other financial institutions are looking into the potential of blockchain technology.

3. Cost

What is DeFi?

Another important thing about blockchain technology is that it is cheaper than centralized databases. Centralized databases are expensive to maintain, as all the information is stored in one place. This means that the database has to be updated and expanded periodically.

Bottom Line

Decentralized Finance, also known as DeFi, is a growing industry in the fintech space. Projects in this space are disrupting traditional finance by removing intermediaries and middlemen, thereby reducing transactions costs and promoting transparency. The technology is so vast that it’s difficult to determine which projects are worth investing in.

What To Do Next?

If you are a beginner and have no understanding of Blockchain; you probably wouldn’t make any sense of this article. Firstly, it is a great start to understand how Blockchain technology works. We recommend you take a look at our article on What is Blockchain Technology & How Does It Work?