DeFi is a short for Decentralized Finance, a new alternative for the outdated traditional finance (TradFi), where, instead of having a central authority that controls what happens with the money (banks), we have pieces of code that ledger transactions (blockchain). Traditional finance is based on trust in one’s government or banks. However Blockchain is a trustles system, with smart contracts guiding the transactions where all can be verified in real time on a public ledger.
Using this new technology, you are in control of what happens with your finances, and what you can do with it. But, let’s see how DeFi works and why DeFi is important for the future of the economy. .
Why should I use DeFi?
DeFi is a growing technology that offers us tools to take control over the future of finance. Each day DeFi is gaining popularity, making the knowledge of these topics fundamental to keep up with the financial playground in the future.
though DeFi is focused on the finance world, the technologies DeFi uses like blockchain, are suitable for other decentralized projects like Web 3.0, where you take control over the information you share on the internet, instead of letting huge companies use our personal data as it pleases them.
DeFi: an economic revolution.
DeFi is a new way to understand the economy, there’s a lot of ways the community can participate to construct a brand new financial system without all the restrictions TradFi gives us. These are some use cases that DeFi provides us with:
Insurance:
Who likes to be worried about losing their assets? Nobody. That’s why, with the implementation of smart contracts, the insurance industry can evolve with the safety that a code-based system like blockchain is supporting their money.
Total control over your assets:
DeFi gives you freedom over your assets management. You can instantly decide if you want to buy, sell, lend, borrow, invest, transfer, etc. without any limitations that banks and governments may give. Also, there’s no third party involved in the use of your gains.
Decentralized Autonomous Organizations (DAO’s):
These entities work as decentralized institutions in charge of basic financial operations, like fundraising, asset management, and governance implementation. By its autonomous character, they do not follow the boundaries set by central institutions.
Risk Management:
With the transparency DeFi offers, all the transactional data is available and extended to all the people that look to evaluate financial disclosure. This access can help companies to take well-informed decisions, find new financial opportunities and improve risk management strategies.
How does DeFi work?
Like cryptocurrencies, DeFi uses an emerging technology known as blockchain which guarantees that even if a single point on the network is attacked, it can continue to function through a majority consensus between other nodes, keeping everyone’s funds safe and sound. It also ensures that every financial action is accepted since no central body regulates the network. But, what is a blockchain?
Lets not bang our heads on the wall with complex definitions, and let’s break it down into manageable chunks: A blockchain is an immutable, distributed ledger. What this means is that it’s a record of transactional information (ledger), which isn’t all piled up in a single place (distributed) and cannot easily be changed (immutable).
This is the single piece of technology that makes DeFi so disrupting. It’s what makes it possible for you to be a custodian of your own money, so you don’t have to rely on a bank.
It’s time to take control
This new alternative shows us a brighter outlook about the finance world of the future. With Decentralized Finance, the way we see the world’s economy can change, with a more available way to make transactions it could increase the participation in the financial decisions than only a few privileged ones are able to make these days.
To dig deeper into these topics, stay tuned to our next article “The Advantages and Downsides of DeFi”.
