All about Defi here on YourCryptoLibrary!

Defi

Borrowing money without a bank, trading stocks without brokers, raising money without venture capitalists, printing money without central banks and so much more. These are some brand new concepts that the new decentralized financial world brings. On this page, we delve into the magical decentralized world of cryptocurrency.

What is Decentralized Finance (DeFi)?

Decentralized Finance, abbreviated DeFi, is a set of new financial instruments based on the decentralized systems. The main goal of DeFi is to create a new financial system that is self-contained and independent of centralized institutions.

DeFi platforms enable savings, loans, insurance and a host of other financial transactions to be carried out anywhere, anytime. All that is required is an Internet connection that provides access to the decentralized applications.

These decentralized applications make use of the so-called smart contracts. Through these it is possible to take care of all the above mentioned matters without using an intermediary. DeFi gives people without a bank access to financial services through blockchain technology.

What are the characteristics of DeFi?

In summary, the following elements are characteristic of DeFi protocols:

Decentralized: No central party owns the project, it’s powered by the community.

  • Open-source and transparent: Anyone can verify and control the smart contract(s).
  • Permissionless: Location doesn’t matter, anyone can access the platform by connecting their wallet. The platform does not hold custody over your funds, web3 is used for this.
  • Anonymous: No know-your-customer (KYC) or anti-money laundering (AML) verification required.
  • Composable: Developers can build on existing protocols and connect them together (lego blocks).

The financial shift

When we look at the interest rates that barely exist anymore through traditional institutions, or notice that banks even dare to charge money to keep a savings account open, the future looks dark for people that simply save up their money.

DeFi offers a modern solution to these old concepts stemming from a broken traditional financial world. In DeFi, interest can be earned back in the form of yield farming. And instead of paying transaction fees, one can pocket a portion of the transaction fees themselves. With the advent of decentralized exchanges, one can take on the role of market maker. A role that until recently was only reserved for large institutions.