DeFi: what is decentralized finance and how does it work in practice?

Emerging within the context of cryptocurrencies and blockchain, DeFis (Decentralized Finance) have the potential to be increasingly present in our daily lives.

But many people still doubt this technology.

So, let’s know now what do decentralized platforms do?

Understand how to use it in practice!

What is decentralized finance?

Decentralized finance or Decentralized finance (DeFi) is a term used to cover a variety of financial applications and projects. They occur without the need for centralization in a governance authority.

The idea of ​​this ecosystem is to use technology to improve digital currency transactions, using completely disruptive tools.

DeFi: how does it work and what are decentralized finance for?

Emerging with the cryptocurrency segment, most DeFi projects work from open source. They are based on blockchain networks.

This means that they do not depend on any company for their operation. Transactions are interconnected peer to peer, person to person.

In this way, the premise of DeFi platforms is to transform the financial system as we know it today. This is because its technology allows the removal of intermediaries from financial transactions such as banks or cryptocurrency brokers, for example.

To make it easier to understand, it is possible to make the following comparison: while Bitcoin (the most popular cryptocurrency today) emerged to decentralize money, DeFi was created to decentralize financial services.

How did decentralized finance come about?

With the launch of the Ethereum network in 2015, it was possible to see DeFis as a real possibility.

From this blockchain network, there was a maximization of the potential for application in the financial sector. This encouraged the market and companies to build and deploy projects within this ecosystem.

Decentralized finance: what is possible to do in practice?

There are several financial services to perform in a DeFi ecosystem.

Decentralized finance works through so-called “smart contracts”. These are programmable digital operations that allow you to automatically execute a previously defined code.

Through these platforms, it is possible to simplify the taking out of loans, mortgages, insurance and also facilitate the trading of cryptocurrencies, such as Bitcoin.

In practice, it is possible to use a cryptocurrency to lend money or make a loan.

In this way, DeFi platforms allow investors , financiers, borrowers, sellers and buyers to trade and interact with each other directly.

DeFi: what are the benefits of decentralized finance?

The benefits of decentralized finance beyond simplifying financial transactions is lowering the cost of providing these products.

After all, without intermediaries or mediators, one can significantly reduce. Thus, the operation is cheaper for those who request it and, at the same time, more profitable for those who lend.

Another point in favor is that with the so-called “self-governance”, the idea is to make it easier for people who normally would not have access to these services to enjoy them. This makes your range potential even greater.

Furthermore, as it is a technology that directly connects users, transaction transparency is another advantage of decentralized finance.

That’s because, this ecosystem can only exist if the information is shared with all users.

How is decentralized finance managed?

Decentralized finance platforms usually have foundations and support institutes to enable “self-governance”.

In order to be able to decide on operation particularities such as interest rates , accepted assets, among other issues, users buy specific tokens.

Once you have these specifics decided, the service becomes scalable, based on an engaged community.

Are decentralized finance platforms secure?

As it is a decentralized protocol, without the involvement of a large corporation, it is recommended that the user be more attentive, experts warn.

This is because there can always be a risk of error. And if a technical or human failure occurs, there is no SAC service in which the customer can call and solve the problem quickly.

Another issue is that it is still a fairly new segment. Therefore, we must take into account the lack of government regulation.

There are many cases where hackers managed to take advantage of a flaw in smart contracts to steal cryptocurrencies, for example.

To avoid unpleasant surprises, it is always good to pay attention to aspects such as the volume traded, the technical team involved with the project, the purpose and method of use.

Are decentralized finance platforms worth it?

Decentralized platforms are worthwhile, as the idea is to directly contribute to the creation of disruptive solutions in the sector and expand their access to more people.

However, the decentralized finance ecosystem is still in its infancy, although there are high expectations regarding the changes it can bring about globally in the coming years.

Currently, most platforms are built within the Ethereum network, but many alternative public networks are emerging.

And the entry of new players in this segment can add multiple benefits such as potential gains in scale and security.

All this can make processes more efficient and transparent. And, of course, at lower costs.

Finally, it is always important to highlight that this is a service provided in a relatively new way, without intermediaries. Therefore, anyone who wants to enter this market should study it carefully about how it works.