If you are a nostalgic person and have been interested in the financial markets for a few years, you probably missed the good old days when everything was much simpler. While the concepts are becoming more and more complex, almost every discussion converges to the clash between centralized and decentralized finance. We are all familiar with the former one, but what about the latter? Let’s dive into DeFi and understand what is so fascinating about it.
What is DeFi?
DeFi simple means the adaptation of traditional bank services to decentralized technologies, especially Blockchain. What it aims first is to disrupt all the financial intermediaries and centralized regulatory organs in order to expand the capability of financial services. These financial services are not only simple data or value transfers, but also more complex ones such as trading, lending, yield farming, flash loans, and derivatives. Cutting out all the middlemen speeds up transactions and lowers the costs, so DeFi has started to draw more and more attention from the market.
Decentralized Applications (Dapps)
Decentralized applications are the base of DeFi. Dapps are the applications that require a decentralized network to function. What differs these apps from the other services that they use smart contracts for a more integrated market. Smart contracts are preprogrammed protocols that allow transactions to be executed very fast if the conditions are met. Most of Dapps are built on Ethereum platform, which focuses on flexible smart contracts beyond simple transactions more than Bitcoin.
Key Features of DeFi
- Openness: All DeFi applications are coded as open-source, which refers to the publicity and credibility of the coding process. Anyone on the platform can monitor and confirm the functionality and security of the applications. This understanding provides a more secure stage for the developers and boosts the popularity of DeFi.
- Interoperability: Interoperability is crucial for the continuity of the system since the protection of previous works is only possible with interoperability. If a user wants to add a new application to the system, they have to be sure that this app works with the others in a harmony. That is how, for example, a person benefits from stablecoins, wallets, and lending platforms together at the same time.
- Permissionlessness: While kicking gatekeepers out of the formula, DeFi welcomes all the people across the world without any concern for approval. All the regulatory systems are based on strong verification processes that demotivate users by slowing the transactions. Thus, DeFi gets more and more people involved in the global economy.
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