Decentralized economy simply explained

DeFi stands for Decentralized economy. In German, this means decentralized finance or decentralized finance and is a generic term for blockchain-based financial applications.

DeFi is one of the biggest application areas for blockchains and cryptocurrencies. Beyond terms like Web3, metaverse, and blockchain games, DeFi is one of the most promising areas in the crypto world.

Blockchain technology can create a transparent and immutable financial system. This new financial system is designed to meet the old one many advantages display. Blockchain technology is designed to ensure that users around the world can send money or interact with each other quickly and cheaply.

Unlike our current financial system, DeFi is off accessible from anywhere in the world. Whether you are off-grid or in a developing country with limited access to banks. A smartphone or computer and an internet connection are enough to connect to the new global economic system.

There is this new financial system decentralized. Again, crypto advocates believe that decentralization has many benefits. Because common financial applications that have a core structure also have core weaknesses. DeFi aims to eradicate these central points of attack and replace them with a more robust, decentralized network or protocol.

In most cases, these decentralized protocols are managed by the native tokens. Token holders get voting rights and can vote on important decisions. That way you will have one democratic administration of protocols strive for.

At the same time, most intermediaries, which cost a lot of resources such as labor in the old economic system, simply disappear in DeFi. Since the new economic applications are mapped as smart contracts on the blockchain, most tasks are now easily automated and performed by computer programs.

All this leads to a new financial system that is supposed to be more cost-effective, safer and more transparent. This is ensured by the immutability of the blockchain. Although DeFi technology is still in its infancy, some promising applications for blockchain-based finance are already emerging.

The use cases for DeFi

Decentralized exchanges (also called DEXs) are the decentralized counterpart to the usual centralized crypto exchanges like Binance. While with a conventional exchange you first have to create an account and, if necessary, make an identification, you register on a DEX directly via your crypto wallet. In this way, you have access to almost every cryptocurrency that exists. Unlike conventional exchanges, pricing on decentralized exchanges works through an algorithm called an automatic market maker.

Usual exchanges is based on an order book. These are also mapped in a decentralized manner on the blockchain and belong to the DeFi ecosystem. This allows users to trade crypto derivatives without a central intermediary. The user experience on these decentralized trading platforms is similar to a normal exchange. It is possible to execute limit orders, stop losses and sell your coins directly on the market.

peer-to-peer lending platforms, also called Lendig protocols. Here financiers make their cryptos available to a protocol that then lends these coins to others. This creates a decentralized ecosystem of borrowers and lenders open to users worldwide. Lenders earn passive interest on their lent assets.

Also more exotic financial products, like trading options or NFT derivatives, can be found in the DeFi world. DeFi enables new types of use cases that would never be possible without blockchain technology. These include, for example, money streaming or lending platforms that accept your NFTs as collateral.

This is how DeFi merges with the other areas of the crypto world, including NFTs, blockchain games, and the Metaverse. This gives rise to many new products, such as NFT exchanges that operate via an automatic market maker, protocols that enable the trading of NFT derivatives, or video games that have their own tokens and thus their very own economy.

The risks of the decentralized financial system

The world of cryptocurrencies can be like the Wild West. It is all the more important that you educate yourself to avoid the risks of crypto. Because many cheating aim at ignorant people and try to get you out of your cryptocurrencies. There are phishing attacks, pump and dumps and many other scams. Here it is extremely important to never give away your private keys and to keep your cryptos safe.

But not only fraudsters, but also software error can be devastating for you. Because these financial applications handle billions of dollars, so-called “bugs” that cause errors in the software are particularly expensive. Although this risk cannot be avoided, it can be limited. Some questions to ask yourself: Has the software been around for a long time? Did the developers do a code audit or were there bug payouts?

Hackers are just lurking to find bugs in the code that they can exploit. But these are not the only risks for DeFi users. As the decentralized financial system is currently subject to little regulation, it is not possible to predict how new state regulations may affect your DeFi investments. Even simply holding DeFi tokens carries risks, and the underlying companies should be scrutinized closely.

Because especially for newcomers, cryptocurrencies are confusing and confusing, even downright dangerous. It is therefore important, especially as a beginner, to deal well with the subject. This is the only way to make informed decisions and survive in the cryptocurrency world.

Therefore, there are several platforms that offer a wide range of continuing education for beginners and advanced users. So if you are interested in crypto education, you can take a look at Binance Academy for example. There you will find answers to the most important questions about Bitcoin, Blockchains, NFTs, Metaverse, Gaming and much more.

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