For the new blockchain and crypto, you may have heard the term decentralized funding or challenge to make it short. What exactly means of Defi and what stimulates its increase? A little context on the business and technology side will help explain it.
If you want to pay someone for an item or service and this person is in front of you, you can just take money from your wallet and pay the other person directly. In technical terms, this is a payment “between peers”. There is no other person involved. Just both.
On the other hand, if you and the other person (or party) are at a certain distance, or even halfway around the world, in general, you want a trusted third party such as a bank, a wire service or a retailer (for example, Amazon) to manage it for you.
Subscribe to Personal finance of Kiplinger
Be a smarter and better informed investor.
Save up to 74%
Register for Kiplinger’s free e-Newsletters
Profit and prosperous with the best expert advice on investment, taxes, retirement, personal finances and more – directly to your email.
Profit and prospere with the best expert advice – directly to your email.
However, some computer scientists have worked on means of returning to a peer payment or exchange method, where he would have the impression of transforming directly with another person without this “trusted third party”.
These initiatives are motivated by the prevalence of bank fraud, theft and scams or even a government intervention (for example, speaking). These computer scientists wanted a system that no “confidence” party controlled, but is controlled by a global community as a whole.
In 2008, someone published a plan of the plan – a white paper for a decentralized cryptocurrency on the blockchain. The author, writing under the pseudonym Satoshi Nakamoto, published the White Paper for Bitcoin. (Note: I am not currently an investor in or have any of the blockchains and crypto mentioned in this article.)
Although Bitcoin (and successive cryptocurrencies) solve the problem of a peer-to-peer means without confidence to send value on the Internet without requiring a bank or a wire service, the cases of blockchain use do not stop there.
After all, finance is not only to send payments to and from the parties.
Enter DEFI
Summer 2020 is often called “Defi Summer”. Due to the pandemic, applications such as Uniswap and Aave suddenly collected more users and have enabled other aspects of finance, not only the value of the remittit (like what Bitcoin does), to transgute on the blockchain (in chain).
These applications take place on intelligent contracts, which initially took place only on another blockchain, Ethereum, but have since been distributed to most new block chains such as Solana and others.
DEFI allows users to compromise with these decentralized smart contract (app) applications without the need for banks.
They are also an alternative to centralized third -party cryptography exchanges, such as Coinbase and Binance, which, although they offer good service, in particular new arrivals, are not the ethics of decentralization if you ask enthusiasts of Hardcore cryptocurrency.
Defi is a tote term that includes everything, tokens Swaps (for example, Ethereum ERC20 tokens); intra-chain bridges (for example, from Ethereum to Solana and vice versa); Yield and liquidity agriculture, which is like saving interest in time deposit; and so on.
I cannot discuss all the possible applications that DEFI encompasses here, especially since others are in development.
The decline
When you deal with a bank, you normally deal with a layer of people such as storytellers, bank directors, customer service agents, etc. Even if you do electronic banking services, this simply automates part of your bank account. There are still people working in the bank who manage your money.
Defi is different. Basically, in DEFI applications, bankers are replaced by smart software contracts operating on blockchains. Because these are software intelligent contracts, there is not much room (if applicable) for human discretion.
If you have filed the payment, the intelligent contract must give this payment to a planned recipient as defined in the code. Basically, if a party has satisfied the requirement, the transaction must be processed.
Once the transaction parties have made the deposit, payment or task required, the intelligent contract guarantees that this transaction takes place, without “trusted human third party” to show discretion on the opportunity to stop it or not.
Of course, this technology does not earn fans in banking space and traditional financing.
For example, the European Central Bank (ECB) is opposed to many Pro-Crypto policies of Trump. Instead, they plead for digital currencies controlled by the bank (CBDC).
Although this would use blockchain technology, it is important to note that their vision of finance based on blockchain is that they would centrally control all aspects of the network, the property would therefore not be decentralized.
The point to take away
Defi is probably the future of blockchain and crypto. It allows financial transactions between peers, even at long distances, not engaged by banking and government restrictions to a certain extent, thus regaining part of our financial freedom and our private life.
We pay someone in cash when we are face to face with him without any other part involved; Defi defenders want the same for transactions to persistent, because the “trusted third parties” who are supposed to ensure that these transactions occur smoothly have not always been up to this task.
Related contents
The information provided here is not investment, tax or financial advice. You should consult an authorized professional to obtain advice regarding your specific situation.
