What is DeFi? A Complete Guide to Decentralized Finance for Beginners

Decentralized Finance (DeFi) is an emerging field in the area of digital finance that ensures financial freedom to the people. This field blossomed in the crypto industry since the launch of Bitcoin (BTC) by its concept and the art of underlying technology. With the creation of cryptocurrencies, various fields came into being and DeFi is one of them that leads the crypto industry.

Decentralized Finance (DeFi) was created as an alternative to the traditional financial system which governed finance and kept an eye on the financial regulation. Traditional Finance aka Centralized Finance (CeFi) acted as the intermediary party in the financial transaction which was a threat to the privacy of clients. There came the DeFi which completely changed people’s perspective about financial systems.

What is Decentralized Finance (DeFi)?

DeFi is a financial or monetary system that is built on the blockchain technology. The basic components of DeFi consist of different and unique protocols, dApps (Decentralized Applications), digital assets and blockchain-based smart contracts.

In a layman’s concept, we can understand DeFi as a financial system which is not governed by the same financial authorities as the central banks or the monetary authorities of the state. In traditional finance, the governing bodies have control over your assets which can be manipulated and regulated by them. But on the other hand, DeFi doesn’t allow anybody else or the governing authorities to manage your assets but only you are the one who has control of your assets.

DeFi VS CeFi

To understand the difference between DeFi and CeFi we will have to dive into our traditional financial systems which are governed by the monetary authorities of the country. In the world of traditional finance, we store our money in banks for saving, transactions, interest and other purposes.

Such financial have to carry out the length process to fulfil our desired activities for which they charge a heavy amount of fee. Moreover, we are restricted by the rules and regulations, working hours, days and other formalities. They act as the intermediary and we regulate our assets at the mercy of their rules and regulations.

Also Read: A Beginner’s Guide To Central Bank Digital Currency (CBDC)

When it comes to DeFi, it gives us financial freedom from all such intermediaries and allows us to manage our assets all by ourselves breaking the boundaries of time and other formalities. You can store your digital assets in your wallets, desired hardware and even in your computer and can utilize them 24/7. As DeFi is built on blockchain technology, it is more secure and reliable for people to rely upon as compared to CeFi.

How Does DeFi Work?

DeFi is commonly associated with cryptocurrencies and its scope extends beyond the mere creation of new digital assets. Smart contracts are developed to replace conventional financial systems.

In the world of DeFi applications, there are no banking institutions to oversee your funds, as there are no intermediaries to authorize transactions. Moreover, the code is accessible for anyone to examine, fostering a sense of transparency within DeFi protocols.

Additionally, these open networks work across international borders, providing global access to crypto users. Users can access a multitude of applications, with the majority of them constructed on blockchain technology.

Significant Features of DeFi

DeFi has changed the financial perspective of people due to its significant features as DeFi offer;

• Transparent Financial Systems
• Not centralized FS
• No authorization to the intermediaries
• Open Source Finance
• Gives full control over digital assets
• Able to perform peer-to-peer transactions
• Use the decentralized apps
• Ensures the safety of assets
• Eliminates intermediaries
• Reduces risk factors
• High-speed transaction
• Trading of Digital Assets

 Conclusion

Decentralized Finance (DeFi) has gained robust popularity and fame against Centralized Finance (CeFi) as it gave financial freedom to people. DeFi world came into existence through the combined adoption of blockchain technology and decentralized services and changed the traditional financial systems. In this era, we witness widespread global access to financial services, secure transactions, affordable fees, and the latest DeFi trends shaping the market.