DeFi (decentralized finance) is a collective term that refers to a host of financial applications in the cryptocurrency or blockchain ecosystem. DeFi is meant to revolutionize finance and disrupt traditional banking systems. The concept of DeFi takes its inspiration from blockchain technology, which is the underlying innovation behind Bitcoin (BTC). Let’s see what is DeFi in crypto.
Blockchain is maintained by a network of computers. Importantly, it is not and cannot be controlled by any central authority. In conventional financial systems, central authorities often limit speed and increase the fees for transactions and make it difficult for consumers to take charge of their own wealth. DeFi is different as it aims to expand the functionality of blockchain technology to boost the world’s financial system.
Bitcoin and other crypto-based payment systems stand out from conventional digital payment channels such as PayPal and VISA. The former has come to eliminate middlemen from managing and regulating transactions. When you use your Visa card to order a product online, an intermediary financial institution has the ability to both stop and record that transaction in their private ledger. With DeFi and crypto, these intermediaries are cut out completely.
Bitcoin and DeFi
Basically, the launch of BTC by “Satoshi Nakamoto” in 2009 laid the foundation for DeFi. Decentralized finance started with the introduction of BTC. The crypto allows people to own digital money securely and transfer it to any part of the world without any hassle. Running on the blockchain network, Bitcoin provides a platform for any number of parties who don’t trust each other to transact safely without intermediaries.
Bitcoin is open to all, but no single entity has absolute control over its rules, unlike fiat issued by governments. Ethereum was originally founded on this same blockchain platform; it allows for smart contracts, which means you can do more than just storing and transferring money.
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Decentralized exchanges (DEXs) such as Loop operate differently from centralized exchanges such as Coinbase and Binance.
Stablecoins and DeFi
The crypto market is highly volatile, and this is a huge concern for many investors. Innovators in the DeFi space have solved the volatility problem of crypto by introducing stablecoins. These are digital currencies whose values are pegged to other assets such as fiat money (say USD and Euros). This way, the prices of stablecoins stay virtually the same as their pegged assets.
Stablecoins like Tether (USDT) and USD Coin (USDC) stay within a few cents of the US Dollar. They are ideal for keeping your crypto safer from market fluctuations. Among the Latin American community, people often switch their crypto to stablecoins in order to protect their savings from economic uncertainties springing from government policies.
DeFi has also created room for decentralized lending and borrowing. With decentralized lending, borrowers use digital assets such as Bitcoin as collateral to secure their loans.