Guide – Defi for Beginners

From #Bitcoin to DeFi👀 Here’s a simple description of Defi. To rephrase: Defi for Beginners!

DeFi can be confusing at the best of times. Because of that, I’ve made a guide below on what you need to know about #DEFI – Defi For Beginners.


Defi For Beginners – What is DeFI exactly?

The word Defi means Decentralized Finance hence, it is a financial technology that utilizes blockchain ledgers for transactions. This helps to eliminate the need for third party individuals or institutions.


What Are The Goals of Defi?

It’s two major goals are to improve access to financial services and reduce transaction times. It also includes the following;

It also helps to eliminate the huge fees charged by banks and other financial corporations.

It gives you financial accessibility no matter your age, gender, ethnicity or location.


Understanding Defi

In order to understand the world of Decentralized Finance, let’s talk a bit about Centralized Finance.

Centralized Finance is a financial system where money is being controlled by banks and other third party institutions. The financial system is full of third parties who facilitate money movement between parties, with each one charging fees for using their services. All other financial transactions cost money; loan applications can take days to be approved; you might not even be able to use a bank’s services if you’re traveling.


Looking at the details above hence the need for Decentralized Finance is inevitable as it eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology. This is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, hardware advancements and its database is distributed across an immutable network known as Blockchain, enabling anyone to use financial services anywhere regardless of who or where they are.


How Does Defi Work?

Defi uses Decentralized Applications Also known as dApps to handle transactions on a distributed and secured database ledger known as blockchain.

The blockchain transactions are recorded in blocks and then verified by other users. If these verifiers agree on a transaction, the block is closed and encrypted; another block is created that has information about the previous block within it.

The blocks are “chained” together through the information in each proceeding block, giving it the name ‘Blockchain’ Information in previous blocks cannot be changed without affecting the following blocks, so there is no way to alter a blockchain.


Defi Products

Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi. A P2P DeFi transaction is where two parties agree to exchange cryptocurrency for goods or services without a third party involved.

To fully understand this, consider how you get a loan in centralized finance. You’d need to go to your bank or another lender and apply for one. If you were approved, you’d pay interest and service fees for the privilege of using that lender’s services.


In DeFi, you’d use your decentralized finance application (dApp) to enter your loan needs, and an algorithm would match you up with peers that meet your needs. You’d then need to agree to one of the lender’s terms and receive your loan (transaction fees and interest are inclusive). The transaction is recorded in the blockchain; you receive your loan after the consensus mechanism verifies it. Then, the lender can begin collecting payments from you at the agreed-upon intervals. When you make a payment via your dApp, it follows the same process in the blockchain; then, the funds are transferred to the lender.


Decentralized Finance Currency

DeFi is designed to use cryptocurrencies for transactions. The technology is still developing, so it is difficult to determine precisely how existing cryptocurrencies will be implemented. Much of the concept revolves around stablecoin, a cryptocurrency backed by an entity or pegged to fiat currency like the dollar.


The Future of Decentralized Finance

Decentralized finance is still in the beginning stages of its evolution. For starters, it is unregulated, which means the ecosystem is still riddled with infrastructural mishaps, hacks, and scams.

Current laws were crafted based on the idea of separate financial jurisdictions, each with its own set of laws and rules. DeFi’s borderless transaction ability presents essential questions for this type of regulation. For example, who is responsible for investigating a financial crime that occurs across borders, protocols, and DeFi apps? Who would enforce the regulations, and how would they enforce them?

Other concerns are system stability, energy requirements, carbon footprint, system upgrades, system maintenance, hardware failures and developers of such financial services.

Many questions must be answered and advancements made before DeFi becomes safe to use. Financial institutions are not going to let go of one of their primary means of making money—if DeFi succeeds, it’s more than likely that banks and corporations will find ways to get into the system; if not to control how you access your money, then at least to make money from the system.


Defi For Beginners


Thanks a lot for reading this Defi For Beginners guide! Hope you have enjoyed/learned something from it! Be sure to have a look at the other guides as well by clicking here! And don’t forget to follow us on Twitter: @AltCryptoGems.

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