"If you don't find a way to make money while you sleep, you will have to work until you die." - Warren Buffet
Money is a good servant in an economy whose foundation runs on business, trade, and commerce. Money is important for all and banking is used to make financial management a piece of cake.
But, there have always been times when trust issues arise through events such as robberies and shooting interest rates on loans or the stock market crash.
Well, if you are looking for a better way to manage your finances and get rid of centralized institutions then hop on to Web3. The decentralized version of the internet is known as Web3. Here everything is decentralized; finance too.
Decentralized Finance is shortened to DeFi. This is where your financial investments and transactions are in a safe decentralized web space. It’s an open, free, secure space that a user can opt for.
How Does DeFi work?
In DeFi, most transactions are related to cryptocurrency. A virtual ledger called Blocks records all cryptocurrency transactions.
Many of these blocks carry encryption by a string of characters called hashes. Since these hashes chain many blocks together, it is known as Blockchain Technology.
Moreover, these hashes are immutable and make sure that no one can disrupt the block or the blockchain. Thus tampering with the transactions, the block or the chain is impossible!
In essence, no one can say that the transaction did not take place because everyone who has access to the block knows that the transaction took place.
Furthermore, you need not rely on centralized institutions to manage your money because the security in DeFi is high, and trading all your cryptocurrency is hassle-free.
Meanwhile, the security of all transactions in the blockchain is taken care of by the effective use of Smart Contracts.
Smart Contracts are virtual pieces of code that contain an agreement between two or more parties; and the conditions under which the contract is executed.
Use Cases of DeFi
Anyways, apart from the obvious advantages of not having any middlemen or higher charges, some of the most common use cases of DeFi are as follows:
- Decentralized Exchanges
Decentralized Exchanges are protocols that aid a user in investing in cryptocurrency by buying/ trading/ swapping or selling digital assets.
🚨Note: A protocol is a set of rules/standards that govern a specific task or activity. DeFi protocols include rules and principles that align with real-world institutions for users.
Stablecoins are cryptocurrencies similar to physical assets. This means you can exchange your digital currency for a stablecoin. There are many stablecoins such as Tether and USDC. You can exchange your bitcoin or Ether for some USDC or vice-versa during a trade without having to convert it to traditional currency.
- Lending Protocols
DeFi has certain lending protocols, where the lender and the borrower have made a virtual smart contract agreement about the conditions upon which the transaction of lending/ borrowing shall occur. It may even have specific instructions about the loan which may be specific to certain contracts.
- Liquid Staking
Liquid staking in DeFi is when a user can use their cryptocurrency or tokens – for transactions to buy assets such as NFTs or stake them while validating blocks. The PoS Network benefits from it due to increased liquidity. And since validators are in total control of their funds, it also magnifies security.
As the name suggests, Bridges are a concept in DeFi which allows a user to transfer assets or digital currency from one blockchain to another. It closes the differences between the blockchain ecosystem and expands scalability between many chains.
DeFi is a novel way to handle the finance of cryptocurrencies on the decentralized web.
Besides, all transactions occur in immutable blockchains. They are tightly secured by hashes and Smart Contracts.
It is open, transparent, and safe with no middlemen in the picture.
Consequently, DeFi serves multiple uses for crypto traders and crypto investors alike. Decentralized exchanges, Lending, and Staking are major advantages of DeFi.
If you’re looking to build your DeFi blockchain for financial services, let us help you with our DeFi development services!