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What is DeFi? Decentralized finances concept

Published:
September 5, 2022

Decentralized finances functioning (DeFi) works on blockchain technologies. DeFi removes rights of intermediaries and gatekeepers to manage operations with assets, giving people opportunities to perform direct exchanges.

Linking DeFi and Blockchain

Blockchain is a key aspect enabling decentralized financial development to exist. It’s “distributed” within decentralized systems: all parties using DeFi have same public ledger that records operations as a code. Thanks to this, while the system is fully protected, people can remain anonymous during operations. Within systems, payments are carefully checked, in parallel with which the states of assets are recorded, the data of which is practically impossible to change.

In case of blockchain decentralization, then there aren’t intermediaries or any third representative participants in the system. Operations’ verification must be carried out by parties using the same crypto.

How decentralized finances work today

DeFi crypto is introduced into many operations. Particularly, it acts on decentralized apps called “dapps”. Decentralized protocols deal with operations’ processing mainly in Bitcoin or Ethereum. First is the most famous crypto right now, but Ether is much easier. DeFI is actively used in following:

  • financial assets operations: monetary transfers, transfers and operations with securities, issuance of loans, registration of insurance payments, etc. can be carried out implementing DeFi coins;
  • exchanges (DEX). To buy digital assets, many use centralized platforms. DEX makes peer-to-peer operations easier allowing users to manage their funds;
  • electronic wallets. The creators of DeFi have developed digital wallets that function regardless of the situation with large crypto exchanges, and provide depositors with access to all functions.

While crypto can show some changeability, DeFi maintains its value because it depends not on digital money, but on the dollar.

Widespread adoption of DeFi grounds on blockchain nature: if decentralized apps are encoded in Blockchain, it may be used by anyone worldwide. When most centralized instruments and technologies develop gradually and are regulated by existing rules and state of region’s economy, decentralized apps operate without any regulations, which increases their profitability. However, this also increases the risks.

Risks associated with DeFi

DeFi has certain risks.

  1. There is no customer protection. DeFi has evolved without specific rules. At the same time, measures to protect customers in case the operation is performed incorrectly were also not provided.
  2. The system can be hacked by hackers. As you know, blockchain itself is almost impossible to modify, but other elements of DeFi are subject to a huge risk of hacking.
  3. Private key requirements. DeFi provides for the protection of wallets that store user funds. Passwords are set on DeFi wallet – certain codes known only to the person who owns the wallet. Having lost the password, the user may, accordingly, lose all his funds, since there is no such option as “recovering a lost password” in the system.

How to implement a DeFi coin?

You can get started with DeFi by following a few methods.

  • Get a cryptographic wallet.

First you need to create wallet. This is the first step to working with DeFi. Next, you need to create a public and private key. However, we once again focus on the fact that if the passwords are lost, then access to the wallet will be closed forever.

  • Asset trade.

You can start with a small amount of assets on decentralized exchanges. So you’ll understand principles of operation of cryptos and operations with them, however, you need to be prepared for certain monetary costs.

  • Stablecoins.

You can try DeFi tokens without risks connected with it through TrueFi – stable tokens aren’t subject to price fluctuations and changes in situations with digital assets.

If you have any questions about DeFi, cryptocurrencies and crypto regulation, contact us. We’ll provide you with comprehensive advice on all aspects of your interest and will become reliable guides in the world of cryptocurrencies.

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