The decentralized finance (DeFi) sector has grown dramatically in 2021 and everything points to further expansion in 2022. DeFi has become an alternative to current financial systems. So far, tens of billions of dollars in cryptocurrencies have flowed through these applications.
What is decentralized finance (DeFi)?
Decentralized finance (or simply DeFi) refers to an ecosystem of financial applications that are built on Blockchain networks. More specifically, the term Decentralized Finance can refer to a movement that aims to create an open source, permissionless and transparent financial services ecosystem that is available to all and operates without any central authority. Users maintain full control over their assets and interact with this ecosystem through peer-to-peer (P2P) decentralized applications (DApps).
5 Advantages of DeFi
These are the main advantages of using decentralized finance:
DeFi transactions are carried out without any geographical restrictions. That is, while in traditional finance some people cannot open bank accounts or receive loans, with a DeFi platform anyone with an Internet connection can have access.
One of the main qualities of Blockchain technology is transparency. All transactions, data, and codes on the blockchain are transparent to everyone. This level of transparency builds trust among users.
Blockchain technology is known for its security. As there are no central authorities involved, users do not have to worry about the security of their funds as it always has full control over them.
However, it should be noted that as with any new technology, there is always some risk associated with its use, although this is no greater than with traditional finance.
In the Blockchain world, interoperability is when two blockchain systems can talk to each other and exchange value. While there is still much to be done, multiple DeFi platforms can already interact with each other securely.
Because DeFi platforms are decentralized, they eliminate any level of middlemen and human intervention. Since the trading rules are automated within the smart contracts implemented on the Blockchain platform, these smart contracts are executed without the need for any manual interference.
5 Use Cases of Decentralized Finance
How can DeFi be applied to the real world? Here are some of the most common use cases:
Open lending is one of the most popular applications within the DeFi ecosystem. DeFi platforms connect borrowers with lenders, thus eliminating the credit check process.
The use of blockchain technology allows for lower counterparty risk, offering cheaper, faster, and geographically unconstrained loans.
Money banking services
Some of the banking services may include issuing stable currencies, mortgages, and insurance. As the blockchain industry is maturing, there is an increased focus on creating stable coins.
As cryptocurrency prices can fluctuate rapidly, decentralized stable currencies could be adopted for everyday use as digital money that is neither issued nor overseen by a central authority.
GemeFi or Play-to-Earn
The electronic gaming industry has also been impacted by new decentralized technologies. What is GameFi? In this new form of gaming, players are rewarded for their gaming skills with DeFi coins.
Yield Farming involves locking up digital resources in exchange for rewards that are usually delivered automatically by a smart contract.
Synthetic Assets are assets that mimic the value of other assets. This allows investors to trade digital and traditional assets, while remaining in the crypto ecosystem.
As you have seen, DeFi platforms are a very good option to offer transparent and secure finances. However, if you have no previous experience, we recommend you get advice from an expert in the field before jumping into the DeFi whirled.
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