What is Defi ? Defi stands for Decentralized Finance. Which means there is no Central Authority who controls your money. The Central Finance bank and government control the flow of money. Defi refers to the system flow of money that is not controlled by central authority.
In general if we have some money we will deposit that money in the bank for a small amount of Interest. And banks will not allow us to use that money for a certain period of time. On the other hand, if another person needs some money, he/she goes to Bank to borrow it. The person has to give some collateral to the bank and he/she will be charged a huge Interest for the borrowed money. The bank provides your deposited money to the borrower and charges high interest, But you will be paid a small amount of Interest . In, this way the bank is controlling your money in Centralized Finance.
Decentralized Finance is a combination of cryptography, blockchain and smart contract.
Here comes Decentralized Finance (defi) where all the money is controlled by yourself. Decentralized Finance(defi) is not any bank but it is a coded system which is open to everyone. In Central Finance we have to trust the bank to deposit our money but in decentralized finance we don’t have to trust anyone because it is a coded open system. Decentralized Finance is a bunch of codes and programs, if you want to verify if it is legit or not, you can simply verify through the smart contracts.
For better understanding let’s take an example, suppose you have a cryptocurrency like Ethereum, you need some money but don’t want to sell that coin. By the help of smart contracts you can deposit your coin to decentralized finance and borrow some money from there . The benefit is you will have full authority on your coin and you can redeem your coin after repayment of the borrowed money. Another benefit of decentralized Finance is if you have any coin you can put that coin in a smart contract and earn interest on yearly, monthly or daily basis.
Some Features of Decentralized finance (Defi)
- No limit of money : You can do as many as transactions you want in Defi. In central Finance transaction limits are made by banks.
- Worldwide Transaction: It is difficult to do worldwide transactions in central finance due to certain rules and policies of banks but in Defi you can do worldwide transactions easily because it is totally controlled by you.
- Cheaper than central finance : Because of certain policies and paperwork central finance is expensive or it’s interest rate is high but in Defi it is hassle free and cheaper because there is no mediator.
- No KYC : While doing transactions in central finances you have to submit your personal details and verify your KYC. In Defi no KYC is needed.
- It is transparent : Whenever we do transactions in central finance there is no transparency of where the money is going or from where it is being circulated but in Defi we can trace all the transactions easily because Defi is an open system.
In summary, we can say that decentralized Finance is a transparent and limitless finance where the amount is fully owned by the real owner. So, it is called the future of finance or finance 2.0.
Defi is not limited to lending and borrowing only. It has many more protocols like defi exchange, assets, payments, derivatives and so on. Amazingly we can create our own new protocol by using existing protocols of defi, which makes it attractive and revolutionary.