What Is DeFi Crypto? An Introductory Guide for Beginners

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Table of contents

  1. Empty
  2. What Is DeFi Crypto?
  3. How Does DeFi Work?
  4. What Currencies Does DeFi Use?
  5. What Are the Advantages of DeFi?
  6. What Are the Disadvantages of DeFi?
  7. In Conclusion

Empty

{"blocks":[{"key":"3ljrb","text":"Ever heard the term DeFi, or decentralized finance, and wondered what it meant? Honestly, it can be hard to keep up with the terms that seem to appear every couple of years or so in the digital world. Therefore, asking about DeFi is only fair for a newcomer!","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":258,"style":"color-rgb(0,0,0)"},{"offset":0,"length":258,"style":"bgcolor-transparent"},{"offset":0,"length":258,"style":"fontsize-11pt"},{"offset":0,"length":258,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5kpr5","text":"So, what is DeFi crypto?","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":24,"style":"color-rgb(0,0,0)"},{"offset":0,"length":24,"style":"bgcolor-transparent"},{"offset":0,"length":24,"style":"fontsize-11pt"},{"offset":0,"length":24,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"djo6j","text":"In this article, we’ll answer your question as well as others you might have on your mind to get the whole picture of how DeFi works.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":133,"style":"color-rgb(0,0,0)"},{"offset":0,"length":133,"style":"bgcolor-transparent"},{"offset":0,"length":133,"style":"fontsize-11pt"},{"offset":0,"length":133,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Is DeFi Crypto?

{"blocks":[{"key":"c3tio","text":"Decentralized finance refers to an emerging technology that aims to remove the control that banks and other financial institutes have on money. In other words, DeFi is based on distributed ledgers that have the same mechanisms behind cryptocurrencies and the blockchain.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":270,"style":"color-rgb(0,0,0)"},{"offset":0,"length":270,"style":"bgcolor-transparent"},{"offset":0,"length":270,"style":"fontsize-11pt"},{"offset":0,"length":270,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"d1u0j","text":"Unlike centralized finance, which describes all your dealings with a bank, DeFi is a system that doesn't center around charging individual fees for their services. Plus, DeFi only requires an internet connection to allow you to use your money via your digital wallet.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":267,"style":"color-rgb(0,0,0)"},{"offset":0,"length":267,"style":"bgcolor-transparent"},{"offset":0,"length":267,"style":"fontsize-11pt"},{"offset":0,"length":267,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"ccu5e","text":"Better still, DeFi isn’t just concerned with direct payments for products or services. It also takes third parties, who will ask for fees, away from other financial applications, such as:","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":187,"style":"color-rgb(0,0,0)"},{"offset":0,"length":187,"style":"bgcolor-transparent"},{"offset":0,"length":187,"style":"fontsize-11pt"},{"offset":0,"length":187,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"bmi23","text":"Loans","type":"unordered-list-item","depth":0,"inlineStyleRanges":[{"offset":0,"length":5,"style":"color-rgb(0,0,0)"},{"offset":0,"length":5,"style":"bgcolor-transparent"},{"offset":0,"length":5,"style":"fontsize-11pt"},{"offset":0,"length":5,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"bapmf","text":"Derivatives","type":"unordered-list-item","depth":0,"inlineStyleRanges":[{"offset":0,"length":11,"style":"color-rgb(0,0,0)"},{"offset":0,"length":11,"style":"bgcolor-transparent"},{"offset":0,"length":11,"style":"fontsize-11pt"},{"offset":0,"length":11,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"1hk0l","text":"Insurance","type":"unordered-list-item","depth":0,"inlineStyleRanges":[{"offset":0,"length":9,"style":"color-rgb(0,0,0)"},{"offset":0,"length":9,"style":"bgcolor-transparent"},{"offset":0,"length":9,"style":"fontsize-11pt"},{"offset":0,"length":9,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"dog5s","text":"Crowdfunding","type":"unordered-list-item","depth":0,"inlineStyleRanges":[{"offset":0,"length":12,"style":"color-rgb(0,0,0)"},{"offset":0,"length":12,"style":"bgcolor-transparent"},{"offset":0,"length":12,"style":"fontsize-11pt"},{"offset":0,"length":12,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"55sve","text":"Betting","type":"unordered-list-item","depth":0,"inlineStyleRanges":[{"offset":0,"length":7,"style":"color-rgb(0,0,0)"},{"offset":0,"length":7,"style":"bgcolor-transparent"},{"offset":0,"length":7,"style":"fontsize-11pt"},{"offset":0,"length":7,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"c0pss","text":"Therefore, using DeFi instead of centralized finance can help individuals and companies cut down on their expenses. Otherwise, their money would be spent on endless banking fees.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":178,"style":"color-rgb(0,0,0)"},{"offset":0,"length":178,"style":"bgcolor-transparent"},{"offset":0,"length":178,"style":"fontsize-11pt"},{"offset":0,"length":178,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

How Does DeFi Work?

{"blocks":[{"key":"1v4he","text":"As we’ve previously pointed out, DeFi uses the same technology that cryptocurrencies utilize to record transactions: the blockchain. This is all managed by applications called dApps.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":182,"style":"color-rgb(0,0,0)"},{"offset":0,"length":182,"style":"bgcolor-transparent"},{"offset":0,"length":182,"style":"fontsize-11pt"},{"offset":0,"length":182,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"7o3om","text":"What happens when you use DeFi to pay for something or transfer money to someone is the following:","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":98,"style":"color-rgb(0,0,0)"},{"offset":0,"length":98,"style":"bgcolor-transparent"},{"offset":0,"length":98,"style":"fontsize-11pt"},{"offset":0,"length":98,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"6u7qv","text":"Once the command is out, the transaction is recorded on the blockchain in block format, waiting to be verified by other users. If the verifiers confirm this transaction, this block will then be closed and labeled with unique encryption.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":236,"style":"color-rgb(0,0,0)"},{"offset":0,"length":236,"style":"bgcolor-transparent"},{"offset":0,"length":236,"style":"fontsize-11pt"},{"offset":0,"length":236,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"6mqfi","text":"After that, another block will be created that holds all the information about the aforementioned block within it, and so on and on. With more blocks being made, a chain will form that will ultimately link back to the original block, which explains the name “blockchain.”","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":271,"style":"color-rgb(0,0,0)"},{"offset":0,"length":271,"style":"bgcolor-transparent"},{"offset":0,"length":271,"style":"fontsize-11pt"},{"offset":0,"length":271,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5ut08","text":"As a result of this secure technology, it’ll be impossible to make changes to the information in previous blocks without affecting the next ones. In other words, each transaction made under the DeFi umbrella will be very difficult to mess with or alter, ensuring your safety.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":275,"style":"color-rgb(0,0,0)"},{"offset":0,"length":275,"style":"bgcolor-transparent"},{"offset":0,"length":275,"style":"fontsize-11pt"},{"offset":0,"length":275,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"equh3","text":"Of course, other software, security protocols, and hardware are also included in the equation to make DeFi as secure as a bank’s system.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":136,"style":"color-rgb(0,0,0)"},{"offset":0,"length":136,"style":"bgcolor-transparent"},{"offset":0,"length":136,"style":"fontsize-11pt"},{"offset":0,"length":136,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Currencies Does DeFi Use?

{"blocks":[{"key":"ft66s","text":"DeFi was created to handle cryptocurrencies, which sounds fair because it follows the same technology that they’re based on. However, because it’s still under development, for the time being, there’s no telling if DeFi will use pre-existing cryptocurrencies or others.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":268,"style":"color-rgb(0,0,0)"},{"offset":0,"length":268,"style":"bgcolor-transparent"},{"offset":0,"length":268,"style":"fontsize-11pt"},{"offset":0,"length":268,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"ceg99","text":"Plus, there still isn’t a clear idea on how some cryptocurrencies, like Bitcoin, will fit in with DeFi.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":103,"style":"color-rgb(0,0,0)"},{"offset":0,"length":103,"style":"bgcolor-transparent"},{"offset":0,"length":103,"style":"fontsize-11pt"},{"offset":0,"length":103,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"7bj2o","text":"Regardless, some experts predict that DeFi will revolve around what’s known as the stablecoin. This cryptocurrency can be bought with fiat currency; a country’s “real money currency” such as the dollar or euro.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":210,"style":"color-rgb(0,0,0)"},{"offset":0,"length":210,"style":"bgcolor-transparent"},{"offset":0,"length":210,"style":"fontsize-11pt"},{"offset":0,"length":210,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Are the Advantages of DeFi?

{"blocks":[{"key":"nsrv","text":"DeFi has surely had people’s undivided attention because it leaves banks and financial institutes out of the equation. Yet, there’s a lot more that individuals find appealing about decentralized finance.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":203,"style":"color-rgb(0,0,0)"},{"offset":0,"length":203,"style":"bgcolor-transparent"},{"offset":0,"length":203,"style":"fontsize-11pt"},{"offset":0,"length":203,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"50v2t","text":"For starters, it grants permission to everybody to use its services. Unlike banks, you don’t have to present specific documents or have certain requirements to control your money. All you’d need is an internet connection and enough knowledge on how to use DeFi applications.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":274,"style":"color-rgb(0,0,0)"},{"offset":0,"length":274,"style":"bgcolor-transparent"},{"offset":0,"length":274,"style":"fontsize-11pt"},{"offset":0,"length":274,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"2ilb5","text":"Second of all, DeFi utilizes blockchain technology to record all the transactions, which boosts your account’s security a great deal. There’s a history of your transactions that anyone can track at any given time, so duplicating information is almost impossible.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":262,"style":"color-rgb(0,0,0)"},{"offset":0,"length":262,"style":"bgcolor-transparent"},{"offset":0,"length":262,"style":"fontsize-11pt"},{"offset":0,"length":262,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"blehj","text":"Let’s not forget that, due to the algorithms that make up the DeFi system, day-to-day human errors that sometimes happen with bank transactions can be non-existent. Of course, mistakes might still happen, but only if the contract is already a weak one.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":252,"style":"color-rgb(0,0,0)"},{"offset":0,"length":252,"style":"bgcolor-transparent"},{"offset":0,"length":252,"style":"fontsize-11pt"},{"offset":0,"length":252,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Are the Disadvantages of DeFi?

{"blocks":[{"key":"al3v8","text":"Even though DeFi shines in many areas, there are some concerns surrounding it that everyone should be aware of.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":111,"style":"color-rgb(0,0,0)"},{"offset":0,"length":111,"style":"bgcolor-transparent"},{"offset":0,"length":111,"style":"fontsize-11pt"},{"offset":0,"length":111,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"1vvvq","text":"For example, because it uses the blockchain as its host, a DeFi project might inherit the blockchain’s instability if it falls into one. And, even though the blockchain is almost always reliable, it can still be prone to risks as it undergoes changes every once in a while.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":273,"style":"color-rgb(0,0,0)"},{"offset":0,"length":273,"style":"bgcolor-transparent"},{"offset":0,"length":273,"style":"fontsize-11pt"},{"offset":0,"length":273,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"2sa1a","text":"Another thing that DeFi lacks is insurance, which centralized finance excels at. If, for instance, a hack happens and an investor’s money is lost through DeFi, it’s highly unlikely they’ll be compensated.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":204,"style":"color-rgb(0,0,0)"},{"offset":0,"length":204,"style":"bgcolor-transparent"},{"offset":0,"length":204,"style":"fontsize-11pt"},{"offset":0,"length":204,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5118e","text":"Also, it’s important to understand that being decentralized can be a con in and of itself, too. Because there’s too much freedom and no middle people to ensure everything goes right, a user might mistakenly lose money, forget a passcode, etc.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":242,"style":"color-rgb(0,0,0)"},{"offset":0,"length":242,"style":"bgcolor-transparent"},{"offset":0,"length":242,"style":"fontsize-11pt"},{"offset":0,"length":242,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"e2nsj","text":"In these cases, no one will be responsible for these beginner errors but the individuals themselves, and there will be no way to undo those actions.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":148,"style":"color-rgb(0,0,0)"},{"offset":0,"length":148,"style":"bgcolor-transparent"},{"offset":0,"length":148,"style":"fontsize-11pt"},{"offset":0,"length":148,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"oanj","text":"All in all, DeFi is packed with plus points, there’s no doubt about that. Yet, it’s still an emerging technology that requires tests and modifications before it becomes mainstream. And, even when it does, a user should be 100% familiar with an application’s interface to prevent potential mistakes.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":298,"style":"color-rgb(0,0,0)"},{"offset":0,"length":298,"style":"bgcolor-transparent"},{"offset":0,"length":298,"style":"fontsize-11pt"},{"offset":0,"length":298,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

In Conclusion

{"blocks":[{"key":"fou9","text":"“What is DeFi crypto?” You might ask after dinner with your tech-savvy friend who seems to always know what’s up in the digital world. Now that you’ve read this brief guide on what DeFi is, how it works, and its pros and cons, you should have a better idea about this concept. Who knows, maybe, in the next few years, using DeFi instead of typical banks will be the norm.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":371,"style":"color-rgb(0,0,0)"},{"offset":0,"length":371,"style":"bgcolor-transparent"},{"offset":0,"length":371,"style":"fontsize-11pt"},{"offset":0,"length":371,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}