An Intro to Decentralized Finance: Part 1

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In this first installment of the Intro to Decentralized Finance series, we’re going to unravel the mysteries of this so-called unstoppable financial force and figure out its implications for your financial future.


We’ll do so in plain, tech-jargon-free English to help you absorb these ideas quickly and make smart money decisions. So let’s start with the what before we get into the why. 


Note: If you haven’t gone through our Blockchain for Beginners series, we highly recommend reading that first. The ideas in this series build upon the underlying technology covered there.


What is Decentralized Finance?

Many people don’t know this, but cryptocurrencies are not the only application of blockchain technology. Bitcoin may have kicked off the blockchain revolution, but it’s no longer the king of this sector. 


DeFi, short for decentralized finance, refers to services that leverage blockchain technology to offer unique financial products. Let’s elaborate on this below. 


The Difference Between Centralized and Decentralized Finance

It is easy to understand decentralized finance by comparing it to centralized finance without ever going into the underlying technical details.


What a Centralized Finance Service Looks Like

Take your bank as an example. That’s a centralized financial service because all the power is vested in the hands of a few central authority figures. 


For starters, you’ve got the bank with its board of directors and executives on top of thousands of employees that could potentially meddle in your affairs. Next, you’ve got the regulators and other government entities that certainly can interfere in your usage of this financial service. Finally, you may have brokers, agents, and other parties involved, depending on the service you use. The list goes on and on. 


Have you noticed a common denominator yet? All centralized finance services have a vast list of intermediaries (or middlemen, if you will) involved in almost every aspect of the solution. 


While they may not directly think of you when making policies and judgments, their routine decisions can and often do trickle down to impact individual customers like yourself. 


What a Decentralized Finance Service Looks Like

Decentralized finance is the opposite of centralized finance. Here, everything is automated using software code to eliminate the need for human intervention from all day-to-day operations. 


A popular example of DeFi is decentralized exchanges. Like the money exchangers from the traditional finance world, these decentralized organizations allow people to buy, sell, and trade cryptocurrency assets. But where things get exciting is how they operate entirely autonomously. 


What that means is that everything is handled by software code. In practical terms, it means:


  • You won’t have to get approval for large transactions
  • You won’t ever get flagged for “suspicious transactions.”
  • You won’t be forced to supply private details or government-supplied identity verification documents

Everything, and we mean everything, is automated through software. Of course, there are usually engineers involved who manage this software and make updates to it, but other than that, you’re all set for impartial, unbiased, and impeccably consistent services.


The Benefits of Decentralized Finance

We’ve established that decentralized finance takes intermediaries out of the equation. But why exactly is that a good thing? Let’s look at a few reasons.


Trustless

People are unique and unpredictable. That’s what makes our species special. But at the same time, every human intermediary in a transaction brings an additional layer of risk. 


With decentralized finance, however, transactions become trustless. You no longer have to rely on the integrity and competency of people because everything is handled by software code. By their very nature, computer applications cannot do anything other than what they’re programmed to. It’s impossible.


Impartial Access

Decentralized finance offers impartial access to all participants. Anyone from any walk of life and any part of the planet—with an internet connection—can use decentralized finance applications. 


There are no favors, favorites, demographic restrictions, or approval requirements. 


Compare that to the endless barrage of restrictions and bureaucratic red tape that’s plaguing the traditional finance landscape, and you’ll see why some of the brightest minds are jumping head-first into DeFi.


Anonymity

This ties in with the previous points. Thanks to the lack of human intervention and legal hurdles, you can use DeFi applications without ever exposing your personally identifiable details to anyone, not even the platform itself. 


So while all decentralized finance transactions, and blockchain transactions in general, are traceable, the details about the individuals making those transactions are impossible to access because they are never gathered in the first place.


High Margins, High Returns

With software handling the lion’s share of daily operations (in fact, 100% of functions apart from miscellaneous developments), DeFi solutions operate on far more lucrative margins. 


Given the young age of this economic sector, however, these projects pass off all the cost savings on to the end-users, and even leverage loss-leader offers to capture the highest share of the market. 


Onboarding new users and growing exponentially is the need of the hour for these projects. As such, they offer lucrative returns that are completely unheard of in the traditional finance space. This is why double-digit annual returns are considered ordinary opportunities in DeFi.


Key Takeaways

Here are the key takeaways from today’s article: 


  • Decentralized finance (DeFi) covers all platforms that use blockchain technology to automate their operations
  • Controlled by software, these platforms offer impartial, uncensored, trustless, and high-yield financial services

At this point, you know what decentralized finance is and all the incredible benefits it offers. We’re going to pick up from here in future installments of this series and cover:


  • Popular decentralized finance services
  • Centralized vs. decentralized exchanges
  • Deep dives into individual categories of decentralized finance services
  • And more

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