What is Decentralized Finance?
Decentralized finance (DeFi) is an umbrella term for a variety of public blockchain applications and projects aimed at disrupting the traditional finance world. DeFi is defined as financial applications built on blockchain technologies, typically using smart contracts, and is inspired by blockchain technology. Smart contracts are automated enforceable agreements that can be accessed by anyone with an internet connection and do not require intermediaries to execute.
DeFi refers to applications and peer-to-peer protocols developed on decentralised blockchain networks that do not require access rights for simple lending, borrowing, or trading of financial tools. The Ethereum network is used to build most of DeFi applications today, but many alternative public networks are emerging that provide superior speed, scalability, security, and lower costs.
The purpose of Decentralized Finance
Decentralized finance leverages key principles of the Ethereum blockchain to increase financial security and transparency, unlock liquidity and growth opportunities, and support an integrated and standardized economic system.
Advantages of Decentralized Finance
The advantages are separated into a lot of aspects :
Highly programmable smart contracts automate execution and enable the creation of new financial instruments and digital assets.
Tamper-proof data coordination across a blockchain’s decentralized architecture increases security and auditability.
The modular software stack of Ethereum ensures that DeFi protocols and applications are designed to integrate and complement one another. Developers and product teams could also build on top of existing protocols, customize interfaces, and integrate third-party applications with DeFi. As a result, DeFi protocols are frequently referred to as “money legos”.
Every transaction is broadcast to and verified by other users on the network. This level of transparency around transaction data not only allows for rich data analysis but also ensures that network activity is available to any user. Ethereum and the DeFi protocols running on it are also built with open-source code that is available for anyone to view, audit, and build upon.
Unlike traditional finance, DeFi is differentiated by its open, permissionless access: anyone with a crypto wallet and an Internet connection, regardless of location and frequently without a minimum amount of funds required, can access DeFi applications.
By using Web3 wallets like MetaMask to interact with permissionless financial applications and protocols, DeFi market participants always keep custody of their assets and control of their personal data.
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Stay tuned for part 2.