In this article, we are going to find out what is DeFi? or what is decentralized finance. Before that, let’s find out why we need decentralized finance & what is the problem with centralized finance or the current world financial system.

Why do we need decentralized finance(DeFi)?

In centralized finance, central authorities like banks and governments rule over our money. Let’s take a scenario when the government rolls out a rule to the user that the user can’t withdraw money from their respective banks. What will happen in this scenario? User is unable to access their own money. In some scenarios, the user pays hefty fees to make transactions.

Users need to follow rules and regulations of the government and banks. This is the problem with financial organizations run by central authorities. Now let’s check how decentralized finance can solve these problems.

What is decentralized finance(DeFi)?

Decentralized finance uses blockchain technology which helps in eliminating central authorities, through a peer-to-peer connection that uses security protocols, connectivity software, and hardware advancements.

Decentralized finance(DeFi) gives freedom to users and more control over their money through personalized wallets and trading services.

How does decentralized finance(DeFi) work?

Decentralized finance applications use blockchain technology. Computer program handles these applications, which are responsible for recording user information and transactions on a blockchain and that is known as Smart Contract.

Smart Contracts are not smart at all. It is only a piece of code, that has several conditions to follow and performs operations basis on that conditions. A user interface is created, which helps the user to perform operations easily. That interface interacts with smart contracts.

Advantages and Disadvantages of decentralized finance(DeFi).

Advantages

• Decentralized applications help the user to invest, trade, and transfer capital all over the globe without intermediaries.
• Organizations can raise funds with IEOs or ICOs or IDOs, by offering tokens as proof of investments like IPOs.

Disadvantages

• Participation in decentralized finance is complex and very hard to understand.
• Very high volatility in token pricing

Big Story Short

Decentralized Finance is the future of the financial system, which will bring the solution to several hurdles like central authority ruling and a hefty amount of transaction fees which vary from bank to bank and country to country.

Decentralized finance uses blockchain protocol and promotes peer-to-peer transactions. Blockchain protocols help in creating a secure and transparent financial system. There is a risk of a smart contract hack whenever code is not written with proper securities.