DeFi: How decentralized finance works

DeFi: How decentralized finance works

What is DeFi and how does decentralized finance work? Under the pledge to revolutionize the financial system as we currently know it, this crypto active segment is already valued at around $85 billion. However, these transactions require maximum attention and knowledge on the part of their user.

3 minutes to understand DeFi, Decentralized Finance

What is DeFi and how decentralized finance works

Digital transformation has arrived in force in the financial market. In recent years, technology has enabled several innovations, notably home banking and fintech’s. However, in parallel, we cannot neglect DeFi technology. For experts, this is a great promise of revolution in the industry.

There has never been so much talk about DeFi as now, all because this crypto active segment is valued at €85 billion, according to Coingecko, the company that analyzes the cryptocurrency sector.

But what does decentralized finance mean anyway? How do they work? Some claim that these crypto currencies were created to decentralize money, and that DeFi came about to decentralize financial services as we know them.

DeFi: how does it work?

With blockchain networks as its structural basis, DeFi technology is a protocol that aims to remove intermediaries from financial transactions, along with banks and cryptocurrency agencies.

The purpose is to have an open source financial services ecosystem, not because it is linked to any company, but because DeFi has no need for permissions since it is available to everyone and operates without any central authority. Its users have full control over their assets and interact through transactions done person-to-person. New DeFi protocols are launched every day, with different functions and purposes, always allowing to perform various financial services, namely loans, insurance and investment.

Will Defi revolutionize finance? Or is it a new threat?

Decentralized Finance: What are its advantages?

Without intermediaries or mediators, the costs associated with this service are very low. Thus, when a loan is taken out through DeFi, the operation is usually more economical for the borrower and more profitable for the lender. Transparency is one of the pluses of this crypto active segment.

Since it is an open signal, it becomes super advantageous for those who otherwise could not enjoy a financial system, since ease of access is one of its positive points. In the so-called traditional system, which is always dependent on the profit of intermediaries, the services are not available to everyone. Thus, and since the costs associated with DeFi technology are very low, it becomes accessible to everyone, and anyone can benefit from its advantages.

DeFi: An eventful quarter on the decentralized finance side

Is it safe?

Besides all the advantages already mentioned, there is a question: is it safe? Rest assured, experts guarantee that it is, that blockchain technology and therefore decentralized finance are also safe.

However, there is always to be extra vigilance, especially for beginners, because there are always fraud attempts, as in everything involving finance, whether online or not.

There is another point to bear in mind: since there are no intermediaries, any this is automatically charged to the user, so you must be sure of what you are going to do before any ‘final click’. In case of human or technical failure, you will not have a service system available to which you can turn.

Furthermore, the lack of regulation also plays a role in deciding whether or not to transact via DeFi technology.

Is DeFi worth it?

When we weigh the pros and cons of decentralized finance, it shows promise. Moreover, experts in this field recommend it to those who want to invest in the crypto-active market.

However, and like everything in life, some caution is required, analyzing its risks and the quality of the assets available in the market. Thus, it is necessary that you choose carefully among so many existing DeFi protocols.

Information is the main criterion for operating in this area. Thus, experts recommend that you pay attention to aspects such as the volume traded, the technical team that is associated with it, purpose and form of use.

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