A new digital financial infrastructure emerged during the era of NFTs and Blockchain: DeFi or decentralized finance. Are you a seasoned entrepreneur? Do you plan to convert to decentralized finance? This guide is made for you. You will find in this post everything you need to know about this new financial infrastructure.
What is Decentralized Finance or DeFi?
DeFi is a newly emerged financial system. This system is a sequence of financial applications aimed at entrepreneurs, or an average person wanting to be independent of banks, insurance companies, various financial institutions, and even the state. It is essentially based on three points:
- A traditional alternating system: it is more efficient than the traditional one, because it has become more innovative and globally accessible thanks to the Internet;
- Its operation is based on open-source public technologies: blockchains;
- The services and products offered by DeFi give everyone the opportunity to exchange financial assets, save money and borrow money.
What are the differences between DeFi and Bitcoin?
Bitcoin and DeFi aim for the same objective: to eliminate intermediaries, in particular, for a money exchange or a loan contract. However, decentralized finance has significant and not insignificant nuances:
- DeFi has a broader concept, covering a suite of financial products, while Bitcoin is simply a decentralized cryptocurrency;
- DeFi builds its value on the Ethereum Blockchain while Bitcoin stakes the value of money on its own Blockchain;
- DeFi can feature finance services built on the Bitcoin blockchain, while Bitcoin is a form of decentralized digital currency;
- DeFi makes it possible to perform various financial services such as borrowing or exchanging cryptocurrencies, lending, in which Bitcoin is included.
Despite the close connection between the two systems, DeFi presents a much broader concept than Bitcoin.
What are the advantages of using decentralized finance?
The general advantage of DeFi is the facilitation vis-à-vis the various transaction protocols for lower costs and considerable time savings.
- DeFi gives easier access to financial services;
- DeFi does not depend on intermediaries, such as banks, like the traditional system on the various financial contracts;
- The DeFi allows access to services similar to banks with more speed and fewer constraints.
Decentralized finance is a fast and unconstrained system that allows you to benefit from financial services.
What are the different financial applications of DeFi?
This financial system already has many financial applications despite its recent emergence. The most important are:
- Lending and borrowing platforms: these platforms use intelligent contracts or the “smart contract” which automatically and directly manage the various lending and borrowing transactions;
- Decentralized exchanges or the “decentralized exchange” or even DEX: these are applications that connect sellers and buyers of virtual currencies;
- Instant loans or flash loans: it is a form of application that provides instant loans without consideration and repayable through a single transaction;
- Staking: it consists of immobilizing a certain quantity of tokens in order to obtain passive income as in the manner of a savings account;