Decentralized finance: What Is DeFi?
Recently, you heard the word DeFi and suddenly felt confused: you did not know what it was, and you did not have the courage to ask the other person, afraid to make a fool of yourself. Even at home, when you searched the Internet for information, you did not find anything useful, only long and complex explanations that are not easy to interpret.
If you really find yourself in a similar situation, then I have great news for you: you are in the right place! Decentralized finance (or DeFi for short) is not the easiest topic, but in this guide, I’ll help you learn everything you need to get started in this world (and not be caught off guard by your friends). If you are ready, let start now.
What it is DeFi
DeFi is an acronym for Decentralized Finance, an experimental form of blockchain-based financial system consisting of a smart contract and two cryptocurrencies : DAI and MKR . The first is designed to maintain value
1:1with the US dollar, and the second is made up of the MKR token holders community, which plays a supervisory role and allows them to propose, change and approve changes to the protocol through a voting system.
In other words, DeFi is a new way of understanding financial services that no longer depend on intermediaries like banks, brokers or other traditional figures and institutions, but are free, open and accessible to everyone in a simple and transparent way.
Today DeFi is a multi-million dollar (or maybe billion dollar) business, like the art of NFT, like the Metaverse; but it all started in 2018 with the idea of a group of entrepreneurs and developers looking for an alternative to the classical financial system, which was considered limited and outdated.
Okay, with the theory we have already arrived … But what is DeFi really for? As in any other financial system, users can participate in the sale and purchase of digital goods and resources , receive loans , take out insurance, and much more.
The only difference is that, of course, is important, is that you need kriptokoshelek (MetaMask – the most famous and widely used, but there are many others). All operations are carried out through DApps (decentralized application ).
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Some of the most famous DApps are:
Decentralized Finance Services are primarily free from any relationship with banks . In addition, they are global and accessible from anywhere in the world (with an Internet connection), they do not change over time, they can be linked, and anyone can use them without permission (they are defined as “without permission “).
These are, without a shadow of a doubt, the main positive aspects. Another important benefit is transparency , as each transaction has a unique code that is visible to everyone.
Disadvantages of DeFi
The main strength of decentralized finance can also be seen as a weakness: the fact that there are no intermediaries can be risky and give the impression of moving on “uncertain ground”.
Another disadvantage is the scalability of the blockchain: Ethereum can process just over a dozen transactions per second, so confirming transactions can be time consuming and costly during particularly congested periods. True, many developers are increasingly choosing to host their DeFi projects on alternative second-tier networks based on Ethereum, such as Polygon.
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However, the vulnerability of the apps that DeFi relies on also raises concerns: What happens if someone manages to hack them? At the moment, there is no form of insurance to protect investors in the event of fraudulent activities and similar problems.