Let’s start by looking at Bitcoin, a form of currency that isn’t controlled by any bank or government. It can be transferred to anyone, from anyone, across the world without the need for a bank. Bitcoin is a form of decentralized money. The financial system around the world is majorly centralized. Banks, stock markets, insurance companies, and other financial institutions have a central authority. This system, also known as CeFi, is prone to mismanagement and fraud. What about decentralizing the financial system as a whole? Well, that is where DeFi comes in.
What is DeFi?
DeFi refers to financial services without a central authority. This system uses decentralized money to build exchanges, lending companies, and other financial institutions. Decentralized finance doesn’t rely on intermediaries such as exchanges or banks but uses smart contracts on a blockchain.
DeFi Components
To build a decentralized financial system, here is what you need: DeFi services work in conjunction with one another, making it possible to mix and match to create new opportunities. The new opportunities created due to Decentralized Finance services working together are called Money Legos. Related Article: Differences Between Digital Currency, Cryptocurrency, and StableCoins
Advantages of DeFi
Risks of DeFi
It seems that the DeFi revolution has reached its early adopter stage, and it remains to be seen how far this will go. The growth of DeFi services will also see a growth in the advantages of DeFi, but also the risks associated with it. Photo by Roger Brown from Pexels
