DeFi (or decentralized finance for short) is a new way of maintaining banking and financial services. The main idea of the DeFi platform is to handle peer-to-peer payments that take place within the blockchain network. As a result, consumers have a chance to avoid third parties and financial intermediaries such as brokers or banks. Today, we call it “trust-less” banking.
In this article, we will explain what DeFi is, how it works, as well as the main pros and cons of using decentralized finance.
As stated earlier, the term “DeFi” stands for decentralized finance. It was developed to deliver multiple financial services to meet both business and individual needs. Customers can complete transactions, transfer payments, and so on. Companies have a chance to sell insurance, and provide loans, deposits, and other financial products.
For investors, a DeFi platform can turn into a personalized banking account without actually a bank. They can send money faster as well as benefit from higher yields compared to those available with conventional banking accounts. It means zero banking fees and commissions as well as the ability to send funds anywhere around the globe.
DeFi takes and expands BTC’s basic premises. As a result, we currently have a self-sufficient digital infrastructure of a digitalized alternative to Wall Street, if you want. The main difference between conventional exchange and the Defi platform is the fact that the second one does charge associated costs to maintain trading floors, brokers’ salaries, bankers’ fees, etc.
Additional benefits include the following:
Now, let’s have a look at how different market participants can benefit from using decentralized finance.
To complete the operation, users generally have to deal with DeFi apps also known as dapps. The majority of them were developed to run within the Ethereum-based blockchain. As mentioned earlier, to use the app one should not provide any personal information.
The following categories may currently benefit from decentralized finance:
It all may sound too good to be true. A new environment with low fees and fast transactions. However, DeFi is far from perfect, at least for now. It comes with several downsides that are very important to consider before using it.
First of all, active trading can still be very expensive despite the lack of intermediaries and third-party fees. Transaction rates on the Ethereum blockchain are fluctuating all the time making them hard to predict in the short perspective.
Secondly, some DeFi apps can lead to extreme volatility. Last but not least, users are the only ones responsible for maintaining their tax records. Keep in mind that different regions establish their own regulations.
DeFi has enormous potential. It develops an alternative financial infrastructure based on peer-to-peer transactions within the Ethereum blockchain. At the same time, the technology is new. On the one hand, it offers higher yields and lower commissions.
On the other hand, it still blinds the potential return to other risks that are still to manage and resolve. Also, take into account a growing number of scams and thieves who can wipe out all your coins right at once. In fact, this particular thing may currently happen to any crypto market participant.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.