Decentralized finance, also known as DeFi, has gained enormous popularity since 2020, with the emergence of prominent DeFi cryptocurrencies like Alpha, Uni, and KLC, to name a few. While many people may have heard of these types of coins, they don't fully understand what they actually are. Therefore, this article aims to shed light on the basics of the DeFi trend and guide investors to make more informed decisions.
First and foremost, it's important to understand what decentralized finance means. In general terms, finance refers to the process of managing money, from those who possess it to those who need it. Traditionally, this process has been controlled by intermediaries such as banks and funds, acting as centralized authorities within society. This is known as Centralized Finance (CeFi).
However, with the development of blockchain technology, which is at the core of cryptocurrencies like Bitcoin, it is now possible to operate in the financial system without the intervention of these intermediaries. This system is known as Decentralized Finance (DeFi). In DeFi, markets are always open, and there are no centralized authorities that can block payments or deny access to financial services. Services that were once slow and prone to human errors are now automatic and more secure, as they are executed through smart contracts, which are Ethereum accounts that hold and send funds according to pre-established conditions. These smart contracts are immutable and execute as programmed, without anyone being able to alter them while active.
The main advantage of DeFi compared to the traditional financial system is that it provides greater freedom and control over assets and transactions. Here are some key benefits of DeFi:
You have control over your money:
In DeFi, you own your assets and decide how they are spent and where they go, without the need to rely on intermediaries to manage your money.
Fast transfers:
Transactions in DeFi are quick and efficient, taking only minutes compared to the days that traditional financial payments may require due to manual processes involved.
Privacy:
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