Decentralized finance, also known as “DeFi”, refers to financial services that run on public blockchains.
- DeFi does not require any third party or centralized authority to operate and offers many features of traditional finance such as lending/borrowing and trading.
- DeFi products use smart contracts that define how DeFi products work and operate.
- DeFi can be used anonymously, but requires DeFi “wallets” that are automatically assigned an “address” to the user to store assets and run decentralized applications.
What is Decentralized Finance?
Decentralized finance (DeFi) is financial products that operate on the blockchain without a centralized authority. In DeFi, you can borrow, buy coins, go long or short, trade an asset peer-to-peer, bid on items, etc. without any higher or centralized authorities. possible.
DeFi is able to operate without third parties through “smart contracts” that automatically execute commands and requests from users interacting with DeFi products. Smart contracts can create stable rules for each DeFi service and how that service is used.
Unlike traditional finance (TradFi), DeFi operates 24/7 on a global scale. Anyone with a DeFi wallet and an internet connection can freely interact with DeFi products. This makes financial services more inclusive and accessible to people who may not otherwise have access to them.
What is the difference between DeFi and TradFi?
TradFi belongs to the world of traditional finance, which is governed by financial institutions and banking associations. Compared to DeFi, TradFi is highly centralized and controlled by financial regulators, banks and the government.
Unlike DeFi, TradFi does not have transparent order books and most financial information about companies and institutions is not publicly available. Everything that happens in DeFi is visible to the public; from small transactions to the code used to create dApps.
There are many possible actions in DeFi that are not possible with TradFi, such as flash loans, 24/7 trading, low accessible trading fees, etc.
What is the difference between DeFi and CeFi?
CeFi stands for centralized finance. CeFi includes most of the capabilities of DeFi, but offers additional security and accessibility options for users who want less risk when using DeFi products.
Being a decentralized network with no authority or regulation means DeFi is prone to malicious activity and programming errors. CeFi aims to reduce security and usability issues while introducing key DeFi concepts to a wider audience. On CeFi, it is possible to lend and borrow assets, trade cryptocurrencies and use credit cards with crypto rewards.
Examples of CeFi include websites such as Binance, Coinbase, and Crypto.com, where users can access centralized exchanges, centralized wallets, crypto credit cards, centralized income, and more. they need to create accounts by following know your customer (KYC) rules to log in.
What are some examples of DeFi?
DeFi consists of many products with different use cases and different perspectives. Below are three popular DeFi products and their use cases:
- longing finance. yearn.finance allows users to embed cryptocurrency into auto lending and trading products. Two of the products include Vaults, which use various investment strategies to generate profitable returns for users, and Iron Bank, which allows users to borrow other cryptocurrencies using their cryptocurrencies as collateral.
- chain link. External data from the outside world and internal blockchain data to various products, individuals, databases, etc. allows sending and receiving.
- Ripple/XRP. A digital payment network, exchange and money transfer service that uses the XRP cryptocurrency for payments and as an intermediary currency for other currencies traded on the network.
Where can I learn more?
If you want to learn more about DeFi and the products mentioned in this article, visit our hub page. To learn more about cryptocurrencies and what they do, check out our available courses or visit our investment center.
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