As blockchain, crypto and metaverse become common terminologies in the corporate world, you may come across the term DeFi repeatedly. Do you know what DeFi is and what it entails? If not, continue to read this post and get an introduction to this new version of the monetary domain.
DeFi: An Overview
DeFi is the acronym for “Decentralized Finance,” a new form of financial and banking services based on peer-to-peer (P2P) services. The infrastructure of this latest iteration of financial operations uses blockchain technology to process payments and all types of financial transactions online.
DeFi will eliminate any traditional financial authorities and intermediaries such as banks and brokers. As the owner of the money, you will have 100% control over your money. In a way, you will be your own bank that can lend money to other peers and earn desired yields.
If you are an investor, you will be able to move your digital currency or money anywhere in the world. Furthermore, you will have access to your money at all times via a digital wallet without having to pay any bank or authorities any kind of fee or transactional charges.
How Does DeFi Work?
The core objective of Decentralized finance is to offer a wide range of financial services for businesses as well as customers to enjoy. You will be able to apply for loans, conduct financial transactions and receive interest on your deposits using DeFi.
Thanks to smart contracts powered by blockchains like Ethereum offer seamless financial services. The ledger technology of blockchain allows you to track all financial transactions on a platform of your choice.
This is similar to running records of your financial transactions on a particular blockchain in chronological order. If you pay someone a certain amount, the blockchain will timestamp that transaction permanently in its ledger.
In order to enable a decentralized financial, your smart contract automatically executes a transaction amongst the parties involved. When someone fulfills the conditions mentioned in the smart contract, it will self-execute as per the stated instructions.
Benefits of DeFi
Decentralized finance offers a myriad of benefits to both individuals as well as businesses. Some of the benefits of DeFi include the following.
- Potential lower costs associated with financial transactions
- Enhanced and foolproof security
- A broader range of financial services
- Elimination of intermediaries and fees associated with them
- Ability to yield higher income via crypto holdings
What are dApps?
Decentralized financial service comes with their own set of applications known as dApps or “Decentralized Applications.” A dApp allows you to transfer your money anywhere in the world. Furthermore, it enables faster settlement of your funds at a lower cost.
You can use dApps for peer-to-peer lending, borrowing, and crypto-exchange services. dApps are also available for NFTs and other services like crypto storage and digital wallet solutions.
The developers pre-program dApps depending on the needs of each transaction. You can use a decentralized application on any specific blockchain for the following:
- Settlement of an agreement between a seller and a buyer
- Moving digital assets to any decentralized lending platform from your decentralized exchange
The functionality and usage of dApps are limitless. The only limit is a developer’s ability to code a dApp to execute the desired instruction.
Some dApps may need liquid cryptocurrency. This will allow your dApps to pay a yield or income in exchange if the investor puts up their crypto coins for a certain time period. dApps provide income to users who can supply liquidity.
This is exactly like a bank paying interest on the money you deposit in a savings account and receiving interest on it. That said, you can yield profits on services based on the type dApp. Some of the common ways to earn profits are:
- Providing coins as liquidity in your coin exchange
- Borrowing against your holdings and farming the coins you borrowed
- Using smart contract to initiate peer-to-peer lending to a borrower
- Staking in proof-of-stake coins like Ethereum
These are some of the best ways to yield high income or profits. Therefore, if you are an investor wondering how to use DeFi to your advantage, any of the above-mentioned ways will work for you.
That said, you must remember that you will still have to pay taxes on your crypto profits. This is exactly like you would pay income tax on any gains or money you earn in the real world.
DeFi may not replace the existing financial infrastructure altogether; it will most likely be the future of the digital financing landscape. Therefore, if you are a company or investor with an online financial portfolio, digital assets, and online financial services, exploring DeFi is something worth it.
If you are searching for a blockchain development company to build a DeFi solution or dApp for you, we at Kamsoft Technologies can help. Speak to our blockchain development team today!