Crypto EDU

Decentralized Finance

  • August 2, 2021
  • Intermediate
  • cryptocurrency
  • ethereum
  • investing
DeFi Delivery (0-00-02-02)

Decentralized finance, or DeFi, as it’s commonly known, uses blockchain technology to allow people to engage in banking activities—like savings accounts, loans, and currency exchange—without using actual banks. With that setup, you no longer have to trust (or pay) a third party, saving money for everyone involved.

From the beginning, cryptocurrencies allowed participants to engage in the most basic banking activity: saving. (If you buy Bitcoin and don’t spend it, that’s saving.) Beyond that, there wasn’t much else. As a platform, Bitcoin doesn’t allow users to do much more than buy, sell, and hold. The open-source Ethereum platform, however, can run applications that allow for far more complex transactions. These applications, called smart contracts, make it possible to get a loan, lend money, accrue interest, and even exchange one cryptocurrency for another.

DeFi marketplaces like Aave automatically match lenders and borrowers, buyers and sellers. Transactions can take place without either party ever having to meet, fill out paperwork, or share private data. And rates are based on supply and demand, determined automatically by an algorithm. While this sounds great, be careful: Given the volatility of crypto and the frequency of scams and hacks, DeFi is rife with risk. In response, however, the crypto community introduced decentralized insurance platforms that offer insurance against unexpected losses—no insurance agent required. 

Why should you care about decentralized finance?

As a technology, DeFi will only continue to adapt and evolve, providing an ever more alluring alternative to traditional finance.

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