DeFi (or “decentralised finance”) refers to financial services provided on public blockchains, especially Ethereum. DeFi allows you to accomplish most of the things that banks do, such as getting interest, applying for loans, making payments, taking out insurance, trading derivatives, exchanging assets, and so on. DeFi, like other cryptocurrencies, is worldwide and peer-to-peer (meaning it takes place directly between two individuals and is not routed via a centralised system), pseudonymized, and available to everybody.
Why is DeFi important?
DeFi is an extension of the core idea of Bitcoin, or digital money, that aims to provide a comprehensive digital alternative to Wall Street without all of the related expenditures (offices, market rooms, and bankers’ salaries). This has the potential to build more open, free, and fair financial markets that are available to everyone through an internet connection.
What are the advantages?
- You are not required to apply for anything or “open” an account. When you create a wallet, you get access.
- You are not required to submit your name, email address, or any other personal information.
- You may move assets anywhere and at any time, without having to ask for permission, without having to wait a long time for transfers to occur, and without having to pay hefty costs.
- Fast: Interest and incentive rates are often (every 15 seconds) adjusted and may be much higher than standard Wall Street values.
- Transparent: All parties involved may observe the whole set of transactions (private companies rarely have this kind of transparency)
How does it work?
In general, users interact with DeFi using software known as dapps (“decentralised applications”), which are mainly operated on the Ethereum blockchain. In contrast to a traditional bank, there is no need to fill out documents or create accounts.
Discover some of the most recent methods to engage with DeFi:
- Borrow: Borrow bitcoins to earn earnings and incentives every minute of the day, not just monthly.
- Get a loan: Get a loan without filling out paperwork, including “flash loans” with very short periods, which banking institutions do not provide.
- Trading: Conduct peer-to-peer transactions of bitcoin assets as if they were stock purchases and sales.
- Saving for the future: Place some of your bitcoins in savings account alternatives to earn higher interest rates than banks typically provide.
- Purchase Derivatives: Make short-term or long-term wagers on certain assets. These are similar to the bitcoin equivalents of stock options or futures contracts.
What are the disadvantages?
- The Ethereum blockchain’s fluctuating transaction fees make active transactions pricey.
- Given that it is a new technology, the investment may be susceptible to considerable volatility depending on the dapps utilised and how they are used.
- For tax reasons, you must maintain your own records. Regulations may differ depending on where you live.