What Is DeFi/Decentralized Finance?
Decentralized Finance, or also called DeFi, is becoming more prominent as a result of technological progress and globalization. Most traditional financial transactions still take place on exchanges, banks, and other financial institutions. This is because most of these institutions have a physical location and often maintain offices and branches all over the world. This requires the institution to keep extensive business relationships, which often include dealing with a wide range of different business models.
Decentralized Finance is simply a branch of computer science that substitutes traditional centralized banks and brokers with smart contract-based networks, which are also commonly referred to as decentralized autonomous organizations (DAOs). These networks function on their own, without any human involvement, instead of relying on human brokers to execute financial services. The primary attraction of decentralized finance is the fact that it allows users to control and access their funds in real time. The ability to transact and make trades instantly is what makes this technology so appealing.
Three Main Advantages For Decentralized Finance
One way in which decentralized finance can be implemented in a market is through a software stack or application. The software stack is typically comprised of two or more different programs that function together to provide a range of different financial services. The most popular software stack in use today is the Ethereum network, which implements a number of different services including settlement layer transactions and asset management. The Ethereum project is backed by several big players in the business world, including Microsoft, Consensys, Digital Currency Group, and Swiss Federal Bank Private Intelligence Services.
Another way in which decentralized finance can be implemented is through the implementation of a decentralized ledger or blockchains. A number of different cryptosystems are currently being utilized around the world. The most notable cryptosystem used in the Ethereum network is the Litecoin. Litecoin is partially based on the original Bitcoin protocol and includes the use of the memory-saving feature called proof-of-work, as well as an enhanced privacy service called Proof-of Stake.
A third way in which decentralized finance can be implemented is through the use of stable coins. Stablecoins are created when members of a network transfer their money into an account. This account stays unspent and accessible for use by other members. Although this type of transaction is not technically making use of any currencies, this class is considered similar to tokens because all that is required is that users send money to another person’s address, rather than spend it.
As seen above, there are several use cases for a decentralized ledger or blockchain. Although there have been discussions on whether or not these types of financial products should be classified as real currencies, the key thing to remember is that the entire system works under the assumption that they are not. When you send money from one place to another, you are really only transferring information or data, rather than actual currency. A future of decentralized finance may not resemble anything like traditional government-issued currencies, but there is still a lot to like about this type of financial system.