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What is Defi?
Decentralized finance, or DeFi, is an emerging concept that is revolutionizing the traditional financial system by leveraging blockchain technology. It aims to provide open, inclusive, and permissionless financial services to anyone with an internet connection, without the need for intermediaries like banks or financial institutions.
To simplify it for beginners, think of DeFi as a new way of conducting financial transactions and accessing financial services using decentralized applications, or dApps, that run on blockchain networks. These dApps are built on smart contracts, which are self-executing agreements with the terms of the transaction written into code.
Now, let’s dive a bit deeper into the key aspects of DeFi and its benefits:
Open and Permissionless: DeFi operates on public blockchains, such as Ethereum, where anyone can participate and access its services. There are no restrictions or gatekeepers, allowing individuals from around the world to engage in financial activities.
Peer-to-Peer Transactions: DeFi enables direct transactions between users without the need for intermediaries. This eliminates the need for traditional financial institutions, making transactions faster, more efficient, and potentially less costly.
Smart Contracts: Smart contracts play a crucial role in DeFi. These self-executing contracts automatically execute the agreed-upon terms once certain conditions are met. They eliminate the need for intermediaries, ensuring transparency, security, and efficiency in financial interactions.
Lending and Borrowing: DeFi platforms offer lending and borrowing services where users can lend their digital assets to earn interest or borrow assets by collateralizing their own assets. This creates a decentralized lending market, accessible to anyone with an internet connection, without the need for a bank or credit check.
Decentralized Exchanges: DeFi also includes decentralized exchanges (DEXs) that facilitate the trading of digital assets directly between users. DEXs remove the need for a central authority to match buyers and sellers, ensuring greater control over one’s assets and reducing the risk of hacks or manipulation.
Yield Farming and Staking: DeFi introduces concepts like yield farming and staking, which allow users to earn additional rewards by providing liquidity to certain protocols or by locking their assets in a smart contract to support network security and consensus.