Do you know what we talk about when we do Decentralized Finance or Decentralized Finance? The creation of new financial and usability paradigms of cryptocurrency technology has a lot to do with the term DeFi, an increasingly widespread trend that you need to know if you have been interested in the Blockchain sector for a long time. Are you accompanying us in an essential post for any lover of finances? Keep reading!
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What is decentralized finance or DeFi?
Decentralized finance is part of a system whereby financial products are available on a public blockchain network, making them open, without centralized custody, and available for anyone to use. In this way, these products do not depend on intermediaries such as commercial banks, central banks or brokerages.
Unlike financial products held by an entity (such as a bank account), access to a product on DeFi does not require a government-issued ID , social security number, or proof of address. We simply need an internet connection and we can now enjoy these services.
DeFi refers to a system whereby software written on blockchains makes it possible for buyers, sellers, lenders and borrowers to interact among peers or with a strictly software-based intermediary rather than with a company or institution facilitating a transaction.
Advantages of decentralized finance
They allow access to financial services by millions of people who do not have assets in the bank, an opportunity for those who want to have financial freedom and who have not been able to enjoy these services.
It develops a new point of economic diversification and development since they have great potential in cryptocurrencies such as Bitcoin.
It facilitates the international financing of companies. They adjust to the needs of a target audience to bring development and investments anywhere in the world safely.
Disadvantages of decentralized finance
Security continues to be a subject of debate within DeFi platforms. Blockchain seems to have proven to be a secure technology but there are still loose ends on security.
Cryptocurrencies can be volatile, even though DeFi platforms have created secure operating mechanisms. This could be insufficient and the entire ecosystem may not be protected from possible fluctuations.
How does decentralized finance work?
Multiple technologies and protocols are used to achieve the goal of decentralization. For example, a decentralized system can consist of a combination of open source technologies , Blockchain, and software.
In this part which automate the terms of the agreement between buyers and sellers or lenders and borrowers, make these financial products possible.
Regardless of the technology or platform used, DeFi systems are designed to eliminate intermediaries between the transacting parties.
Characteristics of Decentralized Finance
- Decentralized finance aims to use technology to eliminate intermediaries between the parties in a financial transaction.
- The components of DeFi are stablecoins, use cases, and a software stack that enables application development.
- It works based on Blockchain technology.
- They are secure platforms since they use cryptographic techniques to ensure that only authorized persons can access.
- They have high levels of decentralization, which means that there is no need for a bureaucratic chain to impose itself on top of the functions of the platform.
- They are transparent. Since they are built on free software, each line of code on the platforms is auditable.
- Without limits or borders. Access to a platform of this type has no borders, so this service can be used without inconvenience from anywhere in the world.
- DeFi apps give users greater control over their money through personal wallets and business services that explicitly cater to individual users rather than institutions.