Decentralized Finance (DeFi); Explained

By July 19, 2021DeFi
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Decentralized Finance (DeFi); Explained

Bitcoin has been in the news a lot lately. Whether it is due to the cryptocurrency getting snubbed by a billionaire or its volatile nature, the cryptocurrency always seems to captivate investors and those who wish they made a move earlier. Since Bitcoin the cryptocurrency is all about digital payments and its future, another term has been floating around over the past few months, and it is called “decentralized finance,” or DeFi. While decentralized finance does not have a formal definition as of yet, it typically involves using blockchain technology to lend or borrow on auction markets. But, there is a lot more to DeFi that you need to know if you’re interested in investing in Bitcoin.

In short, decentralized finance simply means the ability to carry out transactions without needing the traditional bank to be involved in the process. One of the reasons why this concept has many people excited is mainly because of the growing popularity of Bitcoin and other cryptocurrencies and the fact that Bitcoin is the future of financial activities, whether we agree with this statement or not.

Consider all of the things you’d typically do with a bank or other financial institution: obtaining a loan, buying insurance, investing, and even using a credit card. All of these operations are based on traditional money and involve intermediaries; however, individuals are now using cryptocurrency to create these goods in a fully independent manner.

Think of it this way, many proponents of Bitcoin argue that it has the ability to automate and digitize parts of the financial system. This transformation, they argue, is going to be a lot similar to how individuals are progressively integrating their homes with the help of smart technology.

While many in the US may find it difficult to see the attractiveness of a financial system that is not governed by the government, in nations with less financial stability, things might be extremely different. That, coupled with the possibility that Bitcoin could offer just as much, or even more stability as compared to a country’s national currency, and that could be just the edge that Bitcoin needs to get a foot in when it comes to choosing a finance system that’s just as safe and more importantly, stable as the fiat currency.

There are also many other similarities between fiat currencies and Bitcoin that are making the idea of decentralized finance more and more appealing to investors and even some large financial institutions. For instance, different cryptocurrencies can have distinct functions in this evolving decentralized financial system that is being envisioned, just as diverse accounts and instruments in traditional finance are used for various purposes. A good example of this can be the varied types of accounts that you can open at the bank, from savings accounts to various other investment products. Cryptocurrencies can work in a similar way in a decentralized financial system.

Along with these technical distinctions, it’s important to remember that the traditional financial system is regulated to protect the interests of ordinary customers, whereas cryptocurrency and decentralized financial systems are unregulated for now, with just the creators governing and overseeing them.

Unlike the savings you have in your bank, cryptocurrency may not be guaranteed by the Federal Deposit Insurance Corporation (FDIC). That being said, there are cryptocurrency exchanges that offer this protection while others do not. This is one of the factors to consider when investing in cryptocurrencies. If you use an exchange that does not provide this insurance, there is no guarantee that you will be reimbursed if things go sideways. For investing in Bitcoin, check out the bitcoin pro app now.

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