What is DeFi (Decentralized Finance)

 

Introduction – What is DeFi, what does it mean and how does it work?


Decentralized finance (abbreviated DeFi) provides financial instruments without the use of intermediaries such as brokerages, exchanges, or banks through the use of smart contracts on a blockchain. People can use DeFi platforms to lend or borrow money from others, speculate on asset price movements with derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings accounts.

DeFi employs a layered architecture and modular building blocks. Some applications advertise high interest rates but can be risky.
 

Centralized Finance Vs Decentralized Finance (DeFi) – How they differ

Centralized finance

Centralized finance refers to the traditional financial system which involves a central bank such as the Federal Reserve (USA) and Reserve Bank (Australia) which sets interest rates and manages the core currency and then banking institutions that provide financial services such as loans, credit cards and online banking services to send/receive money.

Centralized finance goes through intermediaries that hold and manage the funds on your behalf and are typically traditional banks that have existed for centuries however can also include centralized Crypto currency exchanges like Coinbase which manage the underlying wallet for you.

Centralized platforms are mostly regulated and follow a procedure called “Know Your Customer” and require you to submit ID in order to use the platform such as a drivers license or passport along with a picture of your face to verify your identity.

Decentralized finance

Decentralized finance platforms in contrast work on a peer-to-peer approach without a centralized company or institution.

DeFi platforms work on a Blockchain network such as Solana or Etherium and are driven by “smart contracts” which are essentially computer algorithms that contain different rulesets for the specific application and are designed to run on their own and allow users to co-ordinate transactions between each other.

These smart contracts are made up of a variety of predefined conditions that, when met, cause events to occur within the application, also known as a dapp (decentralized application).

By been built on peer to peer concepts and individual users managing their own Crypto assets and wallets users don’t need to go through verification and can transact much faster in what can be described like a vending machine where the application provides functionality on an ad-hoc as needed basis. An example of this might be an exchange to convert one Crypto coin to another type (e.g. Etherium to Litecoin).


Read more: https://agrtech.com.au/glossary/defi-decentralized-finance/

What is a smart/digital wallet?

 

A digital wallet is a physical device, service, or software platform that enables individuals and businesses to conduct electronic transactions. This can include buying items online or at the point of sale in a physical store, using mobile payments (on a smartphone or other mobile device) or (for online purchases only) a laptop or other personal computer. Other terms for this include e-wallet or smart wallet.

Money can be deposited in the digital wallet prior to any transactions or an individual’s bank account can be linked to the digital wallet. The credentials can be wirelessly transmitted to a merchant’s terminal via Near Field Communication (NFC). Digital wallets are increasingly being used to authenticate the holder’s credentials, such as verifying the buyer’s age to the seller.

Digital wallets can also be used to buy, sell and manage Cryptocurrency assets such as coins like BitCoin or Etherium and NFT’s or manage traditional financial products and assets like credit cards, stocks and other investments.

Read more: https://agrtech.com.au/glossary/digital-wallets/