What is DeFi and why do you need to know about it?
People that keep up with crypto news know that DeFi stands for Decentralized Finance. This means that there are no intermediaries. DeFi works using a blockchain through which you can, for example, borrow financial resources without having to approach a bank. Ethereum is a popular example of a DeFi coin. But why is DeFi so interesting and in which situations can you use it?
Transactions without intermediaries
Borrowing money without a bank is just one example of DeFi's many uses. This is possible because of a protocol that allows financial resources to be transferred directly from one person to another. The transactions are processed through a blockchain, and the interest is calculated automatically. DeFi often works based on open-source programs that are maintained by the community.
Because the transactions take place directly, they cannot be regulated. This can be a disadvantage for governments but can benefit individuals. For example, DeFi can be favorable for people living in a country where the national currency is not stable. Everyone knows exactly where they stand, and there is no interference from banks or brokers.
What are the risks?
While DeFi has many advantages it is also important to be aware of different risks. DeFi has been abused by criminals who want to use developing technology to launder money. Governments may look to take active measures against decentralized finance as a means to regulate the activity. Cryptocurrency, a form of DeFi, can also be very volatile at times, making it more challenging to execute transactions at a specific value in another currency.
The Future of DeFi
DeFi has many applications and is widely used today. With the protocols still under development, we may see the disadvantages of DeFi disappear soon. Projections show that DeFi will only become more popular in the future, so consider how Decentralized Finance can suit your transactional needs.