DeFi : The New Financial System

                          

 
Decentralized Finance or DeFi is a global financial system

“DeFi stands for Decentralized Finance. In simple words, it represents the financing of self-guarding. Unlike traditional financing where a company, bank or fund is responsible for your money, in DeFi no one has access to it,” explains Anton Mozgovoy, co-founder of Mover, the DeFi Savings platform.

With this new emerging technology, DeFi extends what's possible with cryptocurrency beyond just currency and creates complex systems with an abundance of uses with the creation of applications, commonly referred to as decentralized applications, or dApps, which we'll get into later.

DeFi was coined in 2018 by a group of entrepreneurs and Ethereum developers who wanted to unlock funding applications from traditional systems. The shortcut sounds like a challenge, which is intentional.

How does DeFi work

DeFi, formerly referred to as “open finance,” takes the middleman into financial transactions. So instead of your bank or credit card issuer being the intermediary between you and the merchant when you make a purchase, you use the digital currency and have the ownership to use it directly. DeFi is primarily based on Ethereum, the top cryptocurrency next to Bitcoin.

Here are the basic principles of DeFi:

1- There are no intermediaries, so there are no banks or institutions that supervise your money

2- There is a level of transparency, as the code is available for anyone to review

3- There are open networks that transcend geographical boundaries

4- There are many applications for users, mainly based on Ethereum

While DeFi is usually a major player in the cryptocurrency conversation, it goes beyond creating an alternative digital currency or value. DeFi is replacing the role of traditional financial systems with its smart contracts.

“DeFi is all about the code. With the help of things called smart contracts, your money is programmed to perform various [functions]. It creates a unique opportunity for anyone with a computer and an internet connection to participate in the global economy

One of the most attractive parts of DeFi to people is that it removes the barrier of entry for many of these financial transactions. You no longer have a government or company managing your money or need to qualify for certain financial products

With traditional financial systems, you can apply for a loan and may be rejected based on your credit. Have a bank or investment brokerage account with a company that oversees your money.

With DeFi smart contracts, certain financial transactions are executed after certain conditions are met. Smart contracts allow for borrowing, lending, and more, and the terms of the transaction are literally written into the code. While this makes these transactions easier to use and more efficient, it can also make them more vulnerable to irreparable errors.

Because of these smart contracts and Ethereum's ability to create applications, DeFi can be used:

As a lending network, which offers peer-to-peer borrowing and lending

Through decentralized exchanges, where users can exchange one type of currency for another. For example, trading ether in US dollars

To bet, where users bet on the possible outcomes of certain events

As fixed currencies, which link a type of cryptocurrency to a more traditional type of currency such as the US dollar, in order to reduce price volatility and add more stability

DeFi Pros and Cons

Negatives

If you forget your password, you may lose your assets because there is no administrative body

Lack of consumer protection

Positives

There is no intermediary between transactions

May provide more access to loans and insurance without a credit score

May offer higher interest rates

All investing comes with a certain level of risk and DeFi is no different. But any cryptocurrency or DeFi app could have a higher level of risk due to regulatory difficulties (although the SEC is looking to fix this) and potential fraud. A good rule of thumb is not to invest any money that you cannot afford to lose.



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