For those new people for blockchain and crypto, you must have heard of the term decentralized finance, or DEFI. What does Defi actually mean, and what is increasing? A small reference on both business and technology side will help explain it.
An alternative to ‘reliable third party’
If you want to pay someone for an item or service and that person is in front of you, you can simply take money from your wallet and pay directly to another person. In technical terms, it is a “colleague to colleague” payment. No other person is involved in this. Just both of you.
On the other hand, if you and other individuals (or party) are at some distance, or are in half the way worldwide, in general, you want a reliable third party such as bank, wire service or retailer (eg, Amazon) to handle it for you.
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However, some computer scientists are working on ways to return to a colleague payment or exchange method from a colleague, where it will feel that you were directly transacting with another person with that “reliable third party”.
These initiatives are inspired by bank fraud, theft and comprehensiveness of government intervention (eg, debanking). These computer scientists wanted a system that no “reliable” party controls, but is largely controlled by a global community.
In 2008, someone published blueprint – a white paper for a decentralized cryptocurrency on the blockchain. Writing under the author, pseudo -name Satoshi Nakamoto, published a white paper for bitcoin. ,
Although bitcoin (and successful cryptocurrency), without the need for a bank or wire service, a trusted colleague-to-a-pierced method solves the problem, the cases of blockchain use do not stop there.
After all, finance is not only about sending payment from parties.
Enter defi
The summer of 2020 is often called “Defee Summer”. Due to the epidemic, applications such as Uniswap and Aave suddenly received more users and allowed other aspects of finance, not only value remittance (such as what bitcoins do), to transact on blockchain (on-chain).
These applications run on smart contracts, which initially used to run only one more blockchain, atherium, but since then most have spread to new blockchain such as Solana and others.
Defi allows users to transact with these smart contract decentralized applications (APPS) without the need of banks.
They are also an alternative for third -party centralized crypto exchanges such as coinbase and benns, although they provide good service, especially new ones, do not have the ethos of decentralization if you ask hardcore crypto enthusiasts.
The defi is a catch-all term that incorporates everything from the token swap (eg, Etreum ERC20 token); Intra-chain bridge (eg, solana from atherium and vice versa); Yield and liquidity farming, which is like earning interest from deposits at one time; And so on.
I cannot discuss all possible applications that DEFI is here, especially since more development.
Pushback
When you treat a bank, you usually deal with a layer of people such as Taylor, Bank Manager, Customer Service Agent and like this. Even if you do electronic banking, it is only part of your bank account. There are still people who work in a bank who handle your money.
Defee is different. Originally in DEFI applications, bankers are replaced with software smart contracts running on blockchain. Because these software are smart contracts, there is not much space for human conscience (if at all).
If you have deposited the payment, the smart contract should send that payment to an intended recipient as defined in the code. Originally, if one side has met the requirement, the transaction must be processed.
Once the transaction parties have done the necessary deposits, payments or work, the smart contract ensures that this transaction moves forward, in which no “reliable human third party” is not a “reliable human third party” to not be stopped.
Of course, this technology does not win fans in traditional banking and finance places.
For example, the European Central Bank (ECB) opposes many supporters-crypto policies of Trump. Instead, they are advocating the central bank-controlled digital currencies (CBDCs).
Although it will use blockchain technology, it is important to note that their vision of blockchain-based finance is that they will control all aspects of the network centrally, so ownership will not be decentralized.
Tackway
Defi is probably the future of blockchain and crypto. This allows a long distance to a colleague to a colleague financial transactions, not to attach to some extent by bank and government restrictions, thus some of our financial freedom and privacy are achieved.
We pay someone in cash when we are face to face with them without any other side; The Advocates of the defi want the same for vision-andei transactions, because “reliable third party” which are ensuring that these transactions should be smoothly, do not always remain that task.
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Information given here is not investment, tax or financial advice. You should consult a licensed professional for advice related to your specific situation.
