A blockchain-based technology that aims to provide people with a path to access and perform safe transactions. DeFi is a form of a financial system that is not authorized by any third party such as banks, government etc.
The platform allows payment methods only between the sender and the receiver rather than going through middlemen in between.
Based on the blockchain networking, while using DeFi, there is no need for a brokerage account, government-issued ID, address proof, Social security number etc.
Through this system, people can buy, sell, or borrow with a peer-to-peer network rather than a financial institution facilitating in between.
DeFi or Decentralised Finance provides smart contracts and works on providing benefits such as –
- High-profit interests
- speculation on the fluctuating market price of crypto
- Day trading
- Risk-free management
- Interest earning through a savings account
Likewise, crypto trading comes with its own set of pros and cons, with transaction risks on the top of the list. DeFi does provide high-interest rates but pertinent investment risks today.
In order to practice beneficial trading, following the right tactics is the key as DeFi works under highly composable establishment blocks and the asset value now amounts to $100 billion.
Defi Technology Eliminates Middlemen
Another preceding work area of Defi is to eliminate the middlemen between the transactions. The technology makes sure to fulfil the goal of decentralization.
This is done by a mix of an open-source network of blockchain technology and exclusive software. As we have read about DeFi’s smart contracts, they generate agreement terms and conditions between both parties involved in payment for example a buyer and the seller, or lenders and the borrower to facilitate a smooth flow of payment procedure.
Independent of the platform this form of decentralized technology aims to diminish any form of intermediaries between the parties, maximizing a risk-free environment and gaining trust among the community.
Working Of Defi – Decentralized Finance
- One of the most prevalent forms of crypto – Bitcoin was the first asset used for performing DeFi transactions, revolving around applications such as DApps, they work on a public distributed ledger called a blockchain. Substituting the traditional payment methods where transactions were made through exchanged or securities exchange, they are now done directly between the parties through conditioned contracts.
- Another Defi protocol called the Uni swap or DEX is a decentralized exchange working around the Ethereum blockchain. Not only does it allow ether trading through tokens but also provides incentives to form pools in exchange for the trading fee earner for swapping the tokens.
Components Of Defi – Layers Under The System Of Decentralized Finance
Layer 0 (Settlement Layer)
This is the base layer upon which the transactions are formed and consist of a public blockchain with its native currency or crypto form. An example of a settlement layer includes Ether and its token (ETH) traded through a crypto exchange. This layer consists of tokenized versions of assets that are the representation of real-world assets such as the US dollar.
This layer includes a set of regulations and rules that are written to manage and implement characteristic tasks and are given to each firm. These are needed to be followed by every member serving in the industry, here the protocol allows multiple entities to access Defi in order to create an application.
The application layer includes consumer-facing applications that convert protocol into uncomplicated customer services centred around their considerations. This layer includes the common crypto applications such as exchange and lending services.
Another compulsory step after the application layer, once the applications are analysed, the aggregation layer connects them and provides relevant services to the investors, enhancing the BitIQ App and user trust. An example of this service includes lending and borrowing and banking services providing crypto wallets.
DeFi will continue to grow in financial structure, replacing the traditional finance world as stated rightly by experienced demirors. They will yield improvised financial products and services, opening new doors for investors and working for high profit.