What is DeFi in cryptocurrency in simple words
In the open world of information technology, the process of evolution always continues, affecting the implementation of the processes of standards of global trends, such as the financial services market. A new full-fledged digital ecosystem has been created based on blockchain technology. If in the standard version of the real world, the largest players are at the head, exposing rules and restrictions to their participants, then in the world of decentralized finance, the concept of which in cryptocurrency will be understood below, such a problem is excluded. Technologies can work with minimal involvement of human participation.
What is Decentralized Finance (DeFi) and how do they work
The concept of DeFi is an abbreviation of the concept of decentralized finance. Within the framework of the relevant ecosystem, the user gets direct access to financial services, such as:
- Investing money.
- Project lending.
- Trading operations within the largest exchanges.
This is not a complete list of possibilities. They are constantly being supplemented and honed. This is a new look at the future of humanity, which should come taking into account the probable and existing development trends. The user will not have to trust their investments to top companies whose goal is to earn as much as possible in as short a time as possible. Operations take place on the basis of a non-corrupt algorithm.
24 hours a day, 7 days a week, a market participant can freely receive the service he needs.
Key Advantages of DeFi
The main advantages include:
- Openness and transparency. Due to the availability of an audit of the source code, any user is able to assess all the risks and independently make a decision about conducting a transaction.
- Worldwide availability. To access the services, it is enough just to have access to the Internet.
- Operations are managed on the basis of Smart contracts, which allows creating optimal working conditions for all participants without prioritizing the largest ones.
Based on the above, we can single out the most basic advantage – the decentralization of the ecosystem. Financial services management is distributed among a large number of participants and does not have a basic management apparatus. The system is autonomous and cannot serve as a tool for enriching a particular participant. This means that everyone who works in the DeFi system has the ability to regulate processes.
The main directions of development of DeFi
Market participants are free to provide financial services within the cryptocurrency market. The main directions are considered to be:
- Decentralized payment protocols.
- The issue of a cryptocurrency with a fixed value indicator (the so-called stablecoins). The price is usually tied to the most popular fiat currency – the US dollar. But, cryptocurrency can also be used.
- Smart wallets. These are DeFi managers that allow you to manage your resources more efficiently.
- Lending. One user can lend his free crypto assets to another user. If there is a free resource, a noticeable increase in own assets is achieved when debt obligations are repaid.
- Insurance. The policyholder minimizes possible risks from a fall in the value of assets as a result of the influence of external and internal factors on them.
- Direct exchange of crypto assets between participants without involving exchanges. Helps to reduce unnecessary costs of assets and time.
How to make money on decentralized assets
To make money, you should pay attention to the three most common ways:
- Lending under the P2P protocol. When forming an electronic analogue of a loan agreement, a special platform freezes an asset, which becomes a pledge for the borrower to return crypto assets with a predetermined percentage for use. All the main parameters of the transaction are negotiated by the parties.
- Investing. Means depositing assets into liquidity pools. In return, the investor receives DeFi tokens, which can be exchanged for other crypto assets or used as a tool to influence the ecosystem.
- Investments in native tokens of the main platforms. The increase in the value of the asset is due to the increased attention from users to a particular currency.
Disadvantages and risks of DeFi
Despite the fact that the system is actively developing, the influence sector is noticeably inferior to standard financial instruments of the real world. The volume of investments is noticeably lower. There are also quite good reasons to delay the full transition to the digital universe of finance. The disadvantages include:
- The probability of hacking the source code of the Smart contract.
- There is no regulatory body that would monitor compliance with the rights of market participants.
- There is no responsibility to which direct malicious participants would be involved.
Due to the greatly increased level of attention, there is a risk that the market will simply burst from injections, which will lead to a crisis situation. However, after the stabilization of the state, the growth and real application of useful DeFi technologies is likely.
Published: 6 October, 2021