Understanding What is DeFi and Its Advantages in the Crypto World

It is very important for a crypto trader to understand what Defi is. Today, almost all financial services use a centralized technology system.

This means that customers must first have a bank account to enjoy the financial products they need. Of course this is not effective, so DeFi emerged as a solution. 

 

Understanding What is DeFi

What is DeFi and its advantages in investing in crypto assets? DeFi is a financial application ecosystem with a blockchain system and can continue to operate without a centralized authority like other financial institutions. 

DeFi stands for Decentralized Finance whose existence is growing in popularity. This is because DeFi can be used by anyone without having to create a bank account first.

Most financial services still use a centralized system, such as the stock market, insurance services, to banking transactions. 

In fact, this financial service is needed by everyone and can encourage a person’s economic growth for the better. Therefore, Decentralized Finance plays an important role in this modern era to conduct financial transactions without a bank account.

How DeFi Works

To understand more deeply, you must know smart contracts because DeFi is the result of the development of Ethereum’s smart contract technology. 

This technology can run automatically according to the commands that have been programmed in it. For example, for the transfer of Ethereum tokens and other crypto transactions.

One of the advantages of smart contracts is the level of programming that is complex so that developers are more free to develop them. 

For example, DApps (Decentralized Applications) are made with smart contract technology. Basically DeFi with DApss is the same thing and focuses on turning traditional financial services into a decentralized system.

Unlike banks, transactions with DeFi do not require a third-party intermediary. Because all transaction processes are executed with the command code written on the smart contract. 

Uniquely, the Decentralized Finance application code is transparent and open source so that all users can confirm transactions individually anywhere. Some of the services that you can enjoy with this Decentralized Finance application are loan applications, asset deposits, and asset transfers.

Difference between DeFi and Conventional Bank

You’re starting to know more about what DeFi is, right? Well, what is the difference with conventional banks? First, Decentralized Finance can be used by anyone, while conventional banks have quite complicated permits to just create a checking account. This may be one of the reasons why there are still many peoples who do not have a bank account.

The second difference lies in the management system. Conventional banks are managed by institutions, while DeFi is managed through smart contracts and runs on a blockchain system. This means that transactions on Decentralized Finance can run automatically without a third party intermediary.

Transparency is the next difference between Decentralized Finance and conventional banks. Transactions at conventional banks are closed so that only customers and banks know about them. Meanwhile, transactions in DeFi are very transparent with codes that can be seen by anyone. However, transaction activities still use pseudonyms so that your privacy is maintained.

Since its inception, Decentralized Finance has been designed for global transactions. So that everyone can make financial transactions anywhere. You can even transfer money to Decentralized Finance users in other parts of the world. Meanwhile, conventional bank transfer facilities can only be used for transactions in one country.

The advantage

From the explanation of what DeFi is above, there is a smart contract technology used. This technology allows customers to make financial transactions 24 hours a day. You can also make financial transactions such as transfers between Decentralized Finance users who are abroad. 

Other services that can be obtained from DeFi are purchasing insurance products, applying for loans, saving, and much more. Here are the benefits of Decentralized Finance that you can get.

1. Transactions Without Intermediaries

Different from conventional banks, all DeFi transactions do not require the role of a third party. Because DeFi uses blockchain technology, not a centralized system. This transaction without intermediaries is suitable for those of you who often carry out financial activities outside of working hours. In addition, transactions with DeFi are safer because no one else knows.

2. Easy Access

To be able to transact with Defi you don’t need a checking account. The reason is, Decentralized Finance can be accessed via smartphones connected to the internet. This means that access to Decentralized Finance is much easier than other financial services. Even DApps can be accessed in low-income areas that do not have financial services.

3. There is Transparency

As already mentioned a little about what Defi is that Defi is transparent. This means that everyone can see the transaction code in Decentralized Finance. However, to maintain privacy, financial activities that take place use pseudonyms so that they are not known to others.

4. Minimal Transaction Fees

Do you often feel annoyed because of the high admin fees when transferring? By using Decentralized Finance you don’t have to worry anymore, because there are no administrative fees for any transactions made. Again, the reason is that DeFi does not require third party assistance, so transaction fees are cheaper.

5. 24 Hours Transaction

Conventional banks will close services if there is a crisis or problem with the bank. However, not with Decentralized Finance, because transactions will not be closed thanks to the support of blockchain technology. In addition, transactions on Decentralized Finance can be carried out for 24 hours.

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