Why DeFi Is Such a Powerful Technology

Image via cointelegraph.com

Decentralized finance (DeFi), is catching governments and the world by storm. For the first time in history, individuals have the power to perform financial transactions, without an affiliation with any specific country. In other words, performing decentralized transactions is an enormous paradigm shift. Ultimately this places true power in the hands of individuals, rather than the country that governs them.

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What is DeFi?

At this point, anyone who is unfamiliar with DeFi is likely to be interested in understanding this unfamiliar concept. In order to understand what DeFi is, it’s important to understand the difference between fiat currency and cryptocurrency. Simply put, fiat currency is a currency which is distributed and regulated by a specific country. A few examples of fiat currency are the U.S dollar, and the Euro. On the flip side, a cryptocurrency can be imagined as the complete opposite of fiat currency. Cryptocurrencies are decentralized, meaning they’re not bound to a specific country or region. Cryptocurrency also exists as a completely digital currency, unlike fiat currency which can exist either physically or digitally. These core differences between fiat and crypto are crucial to understanding the significance of the DeFi. Without blockchain technology, crypto and DeFi would be unimaginable. How exactly does this all relate to DeFi? In simple terms, DeFi is a way that individuals can perform financial transactions without binding themselves to the regulation of a certain country. However the currency which is being exchanged isn’t fiat money, it’s cryptocurrency. With DeFi, multiple technologies are being employed in order to achieve a fully decentralized exchange.

Blockchain Technology

Blockchain is a new technology that many people know about, however very few people understand how it works. In case you aren’t familiar with blockchain technology, here is an oversimplified explanation. Blockchain technology is made possible because it relies on a network of systems located across the globe. These systems are able to validate the information stored on the blockchain, because each system shares a ledger that stores a record of transactions. In order to add to the blockchain, the systems on the network must collectively verify that the ledger you are adding to is legitimate. There are many steps to this process, which is exactly what makes blockchain technology so fascinating.

Blockchain technology validates information through the utilization of ledgers. For anyone who isn’t familiar with ledgers, here is a quick and easy run down. A ledger can be explained as a database that is shared and synchronized among many different locations across the globe. This ledger is accessible to multiple people as long as their system is part of this network. Blockchain is a variation of this ledger strategy, and it is used in many common cryptocurrencies such as Bitcoin.

How Does DeFi Work?

DeFi operates on the premise of blockchain, all of the currency that is exchanged with DeFi is decentralized. In other words you will not find traditional currencies being exchanged with DeFi. The way in which users send and receive cryptocurrency is through wallets. No, not physical wallets, but rather digital wallets. In order to hold crypto within your wallet, you must either be sent crypto from someone else, or buy the crypto from an exchange. This crypto can be held within a wallet for as long as the wallet owner chooses. Crypto that is held in a wallet can act as an asset. For example, if you invested in Ether two years ago and held it in your wallet until now. You could generate a rather large profit, due to Ether increasing in value since the time that you initially invested.

One More Thing

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