Explain in your own words the DeFi world Why is it important? Let's talk about it.
DeFi is the acronym for the term Decentralized Finance. The term is used to describe a financial world where traditional centralized entitites which acts as intermediaries are not needed to operate. Before the advent of DeFi, the world was used to operating financial needs through the use of banks and other centralized entitites such as centralized exchanges, payment merchants etc.
Decentralized finance helps to handle transactions in a most efficient way which is also very transparent.
How it works
Unlike banks and other financial institutions that processes financial transactions and services amongst different parties, decentralized finance uses technology.
There are two main components of the financial world, they are infrastructure and currency.
Ethereum is a platform that is being used as the infrastructure for DeFi. Because it has the capacity to run smart contracts which helps to perform financial operations without the need of any interference. Anytime the smart contract is enacted it cannot be altered or changed.
While a stablecoin is used as the currency in DeFi because it is a crypto currency that has a value with a traditional Fiat currency. An example is DAI stablecoin. It is a stablecoin that is pegged to USD such that 1 DAI is equal to 1 USD. DAI also has a mechanism where it is backed by a crypto currency collateral rather than a USD reserves.
It's importance
Decentralized finance DeFi is important because it tries to create a new financial markets that is characterized with being permissionless and trustless. As such a significant amount of investment has been put in for the development and advancement of DeFi.
DeFi uses a technology that builds on the current centralized system and tries to improve on it so as to deliver a better user experience and outcome for the world.
It is creating a new world of finance where financial products and services are being carried out without the need for traditional centralized entitites.
DeFi Vs Centralized Finance. Advantages and disadvantages, let's talk about them.
The main difference between centralized refinance and decentralized finance is the use of exchanges. The use of an exchange governs the system in centralized finance.
This made it such that CeFi is the standard of crypto currency trading but DeFi has changed how it is conceived.
Advantages of centralized finance
Centralized finance provides a room for customers services. Because it makes use of a system where there are designated officials in their respective positions.
The speed of transaction is currently quicker as the speed at which can perform them is faster.
The services are very flexible as you can convert currencies of different denominations to other currencies easily. You can also convert some to crypto currencies and vice versa.
In centralized finance, anyone with crypto holdings will transfer them to a centralized exchange. The exchange at the same time takes over the risk of holding the assets and keeping them secure.
It supports a lot of popular coins that are created on the respective blockchains that they run on.
Disadvantages of centralized finance.
The custody of the holdings are transferred from the client to the exchanges involved.
In the process of getting registered on an exchange, your details are given out which makes it less anonymous.
Because the exchange holds the funds of clients in a single platform, it stands the risk of being attacked. Thus making it easier for clients to lose their funds.
Advantages of decentralized finance
Decentralized finance takes away the need to depend on any financial entity or intermediary.
It fosters the democratization of banking and financial services. It will make certain that these services are made available to every individual in a simple but effective manner.
It makes use of a consensus algorithm and cryptography which helps it become immutable. This way records of transactions cannot be manipulated or changed.
It has brought about peer-to-peer borrowing and lending solutions. This is further welcoming as it makes use of smart contracts which allows for a faster and easier verification processes during lending and borrowing.
It has fostered the tokenization of currencies into crypto currencies which can serve different purposes and functionalities.
Disadvantages of decentralized finance
The prominent disadvantage of DeFi is it's issues related to scalability. Transactions are not confirmed as at when due, they usually take an extended period of time.
Not enough liquidity, because it plays a vital role in the effect of transactions.
It doesn't have a shared responsibility. Because intermediaries are taken away, the onus is for the users to take responsibility for their funds and assets.
Have you used decentralized Exchange? Tell your experience and explain a Decentralized Exchange. Show screenshots.
No I haven't used a decentralized exchange before with respect to trading or performing any transaction. However, I have been on a decentralized exchange before and I have slight experience with it.
The little experience I had with it was to know how a decentralized exchange functions and how you can operate with it.
There are two ways that you can access a decentralized application, either through the site of the application or from a crypto currency wallet that gives. But either ways you have to connect your wallet to make any transactions or operations.
The screenshot above shows how a decentralized exchange looks like. It has a swapping feature where you can swap one crypto currency for another one. To perform any operations, you have to connect your wallet to the exchange.
A decentralized exchange is a market place where transactions take place peer-to-peer between different traders without the need of an intermediary. Some examples of decentralized exchanges are uniswap, sushiswap, biswap, etc.
They are run on top of the blockchain that hosts them. The common one is the Ethereum blockchain which hosts a lot of decentralized exchanges.
They don't do Fiat to crypto trading like centralized exchanges. They trade only crypto currencies. They make us of smart contracts that establishes the prices of various crypto currencies and then pair them against each other. This is then followed by a liquidity pool to help facilitate them. And unlike a centralized exchange where the transactions are recorded in the internal database, the transactions in the decentralized exchanges are finalized on the blockchain that hosts it.
Give us your opinion about the future of DeFi
DeFi is trying to reshape the financial world where activities are decentralized and the people have financial control. It is for this reasons that a lot of analysts and participants in the financial world consider define have a say in the future.
It has so far brought about secure and transparent payment solutions. By decentralizing services, clients assets and funds are more secure. You can confidently secure transactions without the need for any need for paperwork.
You can borrow or lend easily and simply. You only need a collateral, unlike a traditional financial institution where your credit score needs to be checked and a fixed asset collateral is given before the loan is granted.
Because of these you don't need intermediaries to request for a loan, you can just get the loan from the lender provided you fulfill the requirements.
The future of DeFi is a bright one as it has shown it's potential, but a lot of development needs to take place.
You have explained well about the decentralized finance system. Actually it is a modern finance system and it would be surely the future of the world's economy.
You are very right here. The decentralised finance provide such a system to the users where they can enjoy there freedom transactions and control over their funds confidently.
Good luck for the contest.
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You have written so well about your understanding on DeFi I love what you wrote.
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