What Is Decentralized Finance (DeFi)？

About Decentralized Finance

Decentralized Finance(DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. Compared to banks and other financial institutions, DeFi has tremendous advantages. You may know that if people use banks to do business, the banks will ask for service fees. While DeFi does not need people to pay any service fee. DeFi allows investors to own digital wallets and use technology to empower individuals with peer-to-peer digital exchanges. By DeFi, people can transfer their funds within a few minutes. It is convenient, modernized, and efficient. Cryptocurrencies such as Bitcoin can be classified as DeFi products.

Centralized Finance vs. Decentralized Finance (DeFi)

Centralized Finance

Traditional, financial institutions and banking belong to centralized finance. In centralized finance, money is held by banks and third parties who facilitate money movement between parties, with each charging fees for using their services. In this system, customer funds are controlled by third parties such as banks that facilitate money movement between parties. The traders have no choice but pay the service fees to these third parties. All financial transactions are overseen in centralized finance, from loan applications to a local bank's services.

Decentralized Finance

As a peer-to-peer financial network, DeFi relies on security protocols, connectivity, software, and hardware advancements. By eliminating third parties and centralized institutions from financial transactions, decentralized finance is able to remove third parties. Financial actions can be recorded and verified in distributed financial databases wherever there is an internet connection. Decentralized finance eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology.

How Does DeFi Work？

In a similar way to cryptocurrencies, decentralized finance utilizes blockchain technology. Blockchains are distributed ledgers or databases that are secure and distributed.

Blocks can be created on the blockchain and then verified by other users. The previous block's information is stored within a new block if these verifiers agree on a transaction.

There is More

If you want to know more about DeFi or you want to explore other knowledge in the financial world. You can open the WikiFX website and check the “Education” section by yourself.