As metaverse buzzes in our ears more and more, you may have heard about DeFi. Decentraliased Finances. What are they? To explain that we will go over system that we use now.
In the past societies used centralised financing. Thats how banks, central banks, governments work. Altho we have the money ‘they’ control it. So every transaction that you want to do is proceeded by bank. Every time you earn money, you have to pay tax, if govement doesn’t want you to borrow money they will raise interest rate, and you won’t be able to afford it.
Centralised finance is also expensive, time for every transaction, keeping a bank account, tax lawyers etc. You can encounter many fees on your way, and many aditional mediators.
So how is Decentralised Finance different? Well there are no banks. Instead there are computers running a code. You don’t have to trust them, they are just peace of code. You can check the code whenever you want, to make sure it doesn’t scam you. What’s more it is not controlled by government, you can insert money from any source. Lastly it’s way, way cheaper.
DeFi is based on five pillars:
Stable Coins – coins that value as much as a currency for example: dollar. To show you how does it work imagine that everytime someone wants to buy stable coin for dollars, new coins are minted, and everytime someone sells them they are burnt. To keep it exactly the same value.
Borrowing and landing – because of anonimity in blockchain it’s hard to think of the way you would borrow money to someone who might be anywhere, and be anyone. Actually there is. Thanks to smart contracts. You can easily deposit your money on a smart contract based platform, that will exchange your money for their “C” or “A” tokens. You will recieve interest accordingly when exchanging tokens back to your currency. Now the borrower will borrow the money, but he will have to give collaterall. Well that sucks right? Not exactly. Lets say you have 3 bitcoins and you dont want the money to be freezed. So you give your bitcoin as a collateral, and recieve money from the smart contracts. If you run away with money code will give your bitcoin to person who lended it. If you make more money by trading with money, that you recieved from your bitcoin, it’s yours minus fees and initial cost.
Decentralised Exchanges – normally exchanging from one currency to another costs a lot of money and is orgenised by your bank, maybe by a exchange company or revolut. Because of centralisation of these, you can exchange only a limited number of currencies. Also fees may weight a lot. Decentralised exchanges base again on a code, which also takes fees, but up to 0,5%. Thanks to blockchain you can buy any currencies you want. Whenever you want.
Insurence – can be code again, that gives you money if the conditions are met. Where does the money come from? Investors lend their money again for a interest rate, and you pay a monthly fee. They get money back and you have insurence. If somthing goes wrong, conditions are met you get the money and they lose it.
Margin Trading – Works the same way as in centralised world, but is run again by a code, and anyone can be investor.
So to summer up, decentralised finance lets you be any part of the system. You can earn money on transactions only banks could do. You can borrow money from anyone and it’s safe. Decentralised Finanance is very flexible, and lets anyone join in.
For Additional info:
Biography:
https://www.coindesk.com/learn/what-is-defi/
https://www.coinbase.com/pl/learn/crypto-basics/what-is-defi
That is an extremely interesting thing to learn about. Crypto is on a verge of revolutionizing financial systems. DEFI definitely shows that current financial systems can be faster and more efficient. In the last 2 years value locked there grew so much that I think more people realised the importance of saving/investing money and having a multiple streams of income. On the other hand it’s a shame that the fees of transactions made on the blockchain are absurdly high and we have to remember that DEFI not only means huge gains but that it comes with a huge risk because of a lack of regulations