How Does DeFi Work?
Platforms for decentralized finance (DeFi) enable the development of decentralized applications by operating on a blockchain network, usually the Ethereum network. (dApps). Without the use of middlemen, DeFi platforms enable people to obtain and offer financial services directly through these dApps. The basic operation of DeFi is described as follows:
- Users create a digital wallet: In order to access a DeFi platform, users must first establish a digital wallet to store their cryptocurrencies and other digital assets. Typically, this is done on the Ethereum network.
- Users deposit assets: Users can add assets to their digital wallets, including coins and other digital assets.
- Assets are locked in Smart Contracts: Smart contracts are self-executing contracts on the blockchain network that impose the terms and conditions of the financial service. The deposited assets are locked into these contracts.
- Users access financial services: Financial services are made available to users through dApps on the DeFi network. These services include lending, borrowing, trading, insurance, and more.
- Financial services are executed through smart contracts: Smart contracts are used to perform financial services, and these contracts automatically enforce the terms and conditions of the service. For instance, in a lending business, the smart contract would keep the collateral until the loan is repaid and automatically release the borrowed funds to the borrower.
- Fees and benefits: Users may pay access fees for financial services, which are usually less expensive than conventional financial services because intermediaries have been removed. In addition, users can get rewarded for making contributions to the DeFi network, like lending money to a decentralized exchange.
- Asset withdrawal: When a user takes money out of their digital wallet, the smart contract immediately releases the money.
DeFi platforms are revolutionizing how we access and deliver financial services by giving consumers greater accessibility, transparency, control, and security. We can anticipate seeing even more avant-garde financial services and apps as the DeFi ecosystem develops.
Decentralized Finance (DeFi) and Challenges to Traditional Financial System
The traditional banking and financial sector is being challenged by the rapidly developing field of financial technology known as “decentralized finance,” or DeFi. The blockchain-based DeFi ecosystem offers consumers a variety of decentralized financial services, such as lending, borrowing, trading, and investing, without the need for middlemen like banks or other financial institutions.
DeFi has drawn a lot of attention in recent years, and by 2021, the entire value of the protocols they lock in has surpassed $100 billion. The blockchain technology that underpins the DeFi ecosystem gives individuals greater control over their assets and financial activities while also enabling transparent and trustless financial transactions.
Within the blockchain ecosystem, a fast-expanding industry called decentralized finance (DeFi) aspires to revolutionize the current financial sector. Financial services can now be accessed and given decentralized without the use of intermediaries like banks or other financial institutions thanks to the introduction of DeFi platforms.