For centuries, banks have been in control of financial services and transactions. But now that era is disappearing as DeFi is becoming more widely accepted with technological advances. Already, the entire crypto market is dominated by DeFi where neither financial institutions, governments, authorities nor politicians can step in to control and make laws that benefit them and often disadvantage customers.
But what exactly is DeFi? Let’s first find out what centralized finance is in order to understand decentralized finance better.
7 Things You Should Know About Cryptocurrencies
CeFi (Centralized Finance)
The English term CeFi (Centralized Finance) is usually used. In centralized finance, financial institutions, such as banks, handle financial services and transfers. These institutions decide how much interest they pay on your savings, how much interest you have to pay to get a loan, transaction fees, and so on. The fees are often quite high, as the banks’ main aim is to make money from their customers.
Another thing that you as a customer cannot control is transaction times. Transferring money from one country to another can take days, which is not ideal if a family member is in trouble while on holiday abroad.
The Game Changer: Decentralized Exchanges
What is DeFi (Decentralized Finance)?
DeFi refers to financial services that are not governed by a central authority. For example, the cryptocurrency industry is completely decentralized. A DeFi (decentralized financial platform) is built on blockchain technology and physical financial institutions have no power there. The contact between the parties involved takes place only between them, without the involvement of a third party. To ensure that both parties stick to what they have agreed, a so-called smart contract is drawn up.
There are many advantages to DeFi
- Customers avoid expensive fees for financial services and transactions.
- Customers have access to fast transfers.
- Customers can get high returns on their savings.
- Customers can take out loans without having to go through complicated checks.
- Everyone can benefit from DeFi services. All that is needed is an internet connection.
A decentralized platform is transparent and open to everyone, including authorities fighting financial crime. All transactions on the platform can be viewed by those connected to the network, known as nodes. But only those involved in a financial transaction are authorized to be active in it. In other words, outsiders cannot go and change anything agreed between the parties involved because the blocks are encrypted. There is no chance that any unauthorized person can manipulate the system.
How did DeFi come about?
DeFi is associated with the second largest cryptocurrency Ether and its platform Ethereum which was launched in 2015. The potential of Ethereum has seen the platform grow at a rapid pace since its launch. Decentralized finance apps (dApps), smart contracts, and the ability to program have made Ethereum’s platform the obvious place for decentralized finance, despite the fact that in practice it would be possible to use any blockchain.
New DeFi services are being added all the time and there is no telling what the industry will look like in a few years’ time, but it is here to stay and now that large multinationals have entered the market, the market is expected to grow even more in the coming years.
How you start trading on DeFi/CeFi
To get started trading crypto you need to choose a platform. Binance, a centralized exchange, is one of the largest and most popular networks offering staking (lending crypto and receiving interest for it), collateral (a kind of security in the form of crypto when you apply for a loan and which is returned when everything is repaid), other kinds of loans, savings accounts and, of course, crypto trading, among other things. A transfer to Binance is most easily done with a credit card or a bank transfer.
Once the money is transferred and in your Binance account, you can choose whether you want to store it in the CeFi platform or if you prefer to invest in a Web3 wallet like Phantom. Before choosing the CeFI platform make sure it is a reputable network and has a good range of financial services.
What are the pros and cons of DeFi vs CeFi?
CeFi’s main advantage is that the manager considers the risks before making an investment. The goal is for the client to receive a certain percentage increase in value and return each year. This means that the manager can be too cautious and if the client had instead invested their money themselves, the client would have saved on the brokerage fee and perhaps even taken greater risks with greater success (or at worst seen their capital decrease in value).
There is a saying in the crypto world: “Not your keys – not your crypto”. If you use a custodian, the company will take care of your keys/codes. And over the years, centralized platforms have been vulnerable to hackers. If you own your keys/encryption keys, you are responsible for them and you are responsible for making sure that no one can access them.
Relationship Between Bitcoin and Inflation￼
DeFi technology is still new and there will certainly be problems along the way before the system is perfected, so it is important that you as a customer find out as much as possible about how a DeFi network works, and its pros and cons.
For beginners who want to enter the crypto market, we recommend starting on a CeFi platform to learn how the market works and what opportunities are available. After a while when you have knowledge of the industry and understand how it works, it’s time to start looking at DeFi and see what kind of DeFi platform would suit you.
Let’s get started with the best and most secure way into decentralized finance: Venice Swap