HERE’S WHAT THE DEFI IS
Good morning dear readers of Tecnogalaxy, today we will talk about what is the DeFi.
DeFi is the abbreviation of “decentralized finance“, a generic term for a variety of financial applications in cryptocurrency or blockchain oriented to the destruction of financial intermediaries.
Defi draws inspiration from blockchain, the technology behind bitcoin digital currency, which allows different entities to hold a copy of a transaction history, meaning it is not controlled by a single central source. This is important because centralized systems and human gatekeepers can limit the speed and sophistication of transactions by giving users less direct control over their money. The defi stands out because it expands the use of blockchain from simple value transfer to more complex financial use cases.
Bitcoin and many other native digital assets stand out from legacy digital payment methods, such as those managed by Visa and PayPal, as they remove all intermediaries from transactions. When you pay with a credit card for a coffee in a bar, a financial institution is between you and the company, with control over the transaction, retaining the authority to interrupt or pause it and register it in its private ledger. With bitcoin, those institutions are cut off from the picture.
Direct purchases are not the only type of transaction or contract supervised by large corporations; financial applications such as loans, insurance, crowdfunding, derivatives, betting and more are also under their control. Eliminating intermediaries from all types of transactions is one of the main advantages of decentralized finance.
Before it was commonly known as decentralized finance, the idea of defi was often called “open finance“.
Most decentralized finance applications are based on Ethereum, the second largest cryptocurrency platform in the world, which stands out from the Bitcoin platform in that it is easier to use to build other types of decentralized applications in addition to simple transactions. These more complex financial use cases were even highlighted by Ethereum creator Vitalik Buterin in 2013 in Ethereum’s original white paper.
That’s because Ethereum’s platform for smart contracts, which automatically executes transactions if certain conditions are met, offers much more flexibility. Ethereum programming languages, such as Solidity, are designed specifically to create and distribute such smart contracts.
THE MOST POPULAR TYPES OF DEFI APPLICATIONS INCLUDE:
Decentralized Trading (DEX): Online trading helps users exchange currencies with other currencies, whether it’s US dollars for bitcoin or ether for DAI. DEX is a type of hot trade , which directly connects users so that they can exchange cryptocurrencies with each other without trusting an intermediary for their money.
Stablecoin: a cryptocurrency linked to an asset outside the cryptocurrency (the dollar or the euro, for example) to stabilize the price.
Loan platforms: These platforms use smart contracts to replace intermediaries such as banks that manage loans in the middle.
Bitcoin (WBTC): a way to send bitcoins to the Ethereum network so that bitcoin can be used directly in the Ethereum defi system. WBTC allows users to earn interest on the bitcoins they lend via the decentralized loan platforms described above.
Forecasting markets: markets to bet on the outcome of future events, such as elections. The objective of the defined versions of the forecast markets is to offer the same functionalities but without intermediaries.
IS INVESTING IN DEFI SAFE?
No, it’s a risk. Many believe that the defi is the future of finance and that investing in disruptive technology in advance could lead to huge gains. But it’s hard for newcomers to separate good projects from bad ones.
With the rise in activity and the popularity of the defi in 2021, many defi applications, such as YAM coin memes, stopped abnormally and burned, sending market capitalization from $60 million to $0 in 35 minutes. Other projects, including Hotdog and Pizza, faced the same fate and many investors lost a lot of money.
Also, the bugs of the defi are unfortunately still very common. Smart contracts are powerful, but they cannot be changed once the rules have been integrated into the protocol, which often makes the bugs permanent and thus increases the risk.
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