DeFi 101: Things You Need To Know About Decentralized Finance

  • ● Interoperability and open-source: this basically means that the various DeFi or decentralized applications can communicate with each other and create complex and more robust systems with code that is open to all.
  • ● Accessibility and financial inclusion: unlike centralized finance or CeFi, for short, anyone with a device having internet access can take advantage of DeFi applications.
  • ● Financial Transparency: since DeFi is based on blockchain, and knowing that blockchain can basically be understood as an open ledger, this means that anyone can easily check and confirm all transactions.
    Unlike the traditional financial system, which uses technology only as a facilitator of transactions controlled directly by a middleman, DeFi uses technology precisely to eliminate the middleman from financial activities.
    The advent of DeFi was only possible through the innovative blockchain technology. In fact, DeFi is based on highly encrypted, open-source, and smart contracts.
    Well, smart contracts are a characteristic that some blockchains have to allow the creation of immutable, self-executing, automated code contracts.
    In the traditional centralized financial system, we are forced to sign a piece of paper and hope for the best. Expect the other party of the contract to abide by the terms.
    Now, when it comes to smart contracts, the pure logic of the code will only execute the transaction if both parties actually meet the conditions.
    This has made possible the arrival of this new type of finance that we know as DeFi. This has removed the human element, which is susceptible to mistakes, corruption, and greed, for the mathematical certainty that everything will occur as predicted.
    dApps
    The decentralized financial instruments of the DeFi ecosystem are known as decentralized applications or dApps. Unlike centralized applications that rely on databases governed by a strict group of authorities, such as Uber, Netflix, and Facebook, or applications from a centralized bank, dApps make use of smart contracts with blockchain technology to distribute data in encrypted form over a huge peer-to-peer network. This prevents censorship, dictatorship, fraud, and errors.

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