What is decentralized finance or DeFi? – YubiGeek

Decentralized finance or Challenge it is finance based on decentralized exchanges. This eliminates the need for the central bank or government to approve a financial transaction. The Challenge relies on blockchain and smart contracts to automate exchanges and ensure that no organization has control.

How is DeFi different from traditional finance?

To understand what is Challenge, it is necessary to keep in mind the functioning of centralized finance. Centralized finances are controlled by the central government. In our case, currency management is carried out by the government and banks. For example, the government may print more banknotes if it wishes, and the bank must approve the loan. The central authority logically limits what you can do with your money.

On the other hand, c Challenge based on blockchain, ie decentralized networks. It runs on computer code called a smart contract. The code is open to all, if desired, it can be studied. After programming, the smart contract works by itself. The exchange is carried out with the help decentralized programs or Dapps. Because the goal is to regain control of users, you can easily transfer money, become a liquidity provider or lender.

How does a smart contract work?

Except for the automatic part, the smart contract is similar to the classic contract. First, stakeholders determine the terms of the contract, which are translated into code. Once the code is generated, it is stored in the blockchain and replicated for each participant. When the conditions are met, the latter check that everything is in order, and the contract is confirmed. However, it should be noted that the smart contract has not yet been legally recognized.

Types of decentralized exchanges

Decentralized exchanges (DEX) have diversified rapidly in recent years. Services similar to traditional banks are now available:

  • Loans and loans: Blockchain-based lending and lending platforms (loans and lending) have emerged rapidly. The smart contract is used to approve transactions and fulfill the terms of the agreement.
  • instant loans or instant loans: these are loans without counterparty risk. You do not need to give a guarantee. On the other hand, there is a prerequisite – reimbursement is made in one operation.
  • Stacking: Stacking is the act of immobilizing your cryptocurrencies in a smart contract to be able to participate in blockchain transactions. Unlike mining, you save your cryptocurrency to reap the benefits.

Advantages of DeFi

The Challenge has a number of advantages, the main of which are the absence of intermediaries and reduced transaction costs. In fact, traditional finance is expensive compared to decentralized finance. It’s also slower. Another advantage is the reduction of error, because the operations are controlled by the machine.

Every transaction is transparent and instantaneous. This ensures the security of exchanges, in addition, reasonable contracts are a guarantee against fraud and fraud. Because the smart contract is fixed, all pre-established conditions must be met to perform the transaction. In case of non-compliance with the conditions, the contract is terminated. Another strength is the anonymity of users. Only one address is used in a decentralized exchange. It is impossible to see the personal information of the speakers.

Disadvantages of DeFi

Decentralized finance still has its drawbacks. The most obvious is its dependence on computer code, you are never safe from error. It is best to use Dapps in a stable version for many years and update regularly. The opinion of users is also important, do not hesitate to ask on the forums.

Another drawback Challenge, the user manages the risks himself, because there is no entity that covers it. That is why it is difficult for decentralized finance to convince the general public. Especially since Dapps are difficult to use because most of them have a smooth interface. You can get lost quickly and the newcomer can move on quickly.