Cryptocurrencies have achieved great success, and perhaps what helped them to achieve this is that they maintain the privacy and confidentiality of the transactions that are carried out in them. These characteristics have also supported decentralized finance.
The field of DEFI crypto emerged after the advent of cryptocurrencies and blockchain technologies. Which is normal since it works on both. Due to the lack of centralization, this type of financing is carried out directly between the two parties, without the presence of an intermediary or supervision of either party.
Conventional and decentralized finance
An individual depends on financial and banking institutions in case he needs a loan or financing. If you go to the bank to borrow $ 10,000, for example, the bank will ask you about your assets or guarantee that you will get the money back.
The loan process is known as simple, since each bank sets its own interest rate, and when it gives you the required financing, you pay it back after the agreed term along with the interest, which constitutes the bank’s profit. On the other hand, the money you provide is actually money from other depositors.
The first thing that can be noticed in this process is that the bank mediates and supervises all operations by itself. The bank does not own the funds, it only plays the role of intermediary in the negotiation process of the funds.
The same is true in all other financial areas, such as insurance and asset management, where a broker manages the process. On the contrary, decentralized finance does not need any intermediary, the user can obtain a loan in an instant, with the security of their cryptocurrency.
The role of stablecoins
This process, instead, is based on what is known as stable cryptocurrencies, which replace real assets since they are linked to assets that guarantee their value over time. Of course, all transactions are carried out through the blockchain network, which guarantees stability and confidentiality.
On the other hand, decentralized financial techniques eliminate the differences between ordinary and wealthy customers. Lending within blockchain networks through decentralized finance is based on individuals themselves, and users lend to each other.
As this technology is based on open source software, it offers users a high level of freedom. For example, any user can transfer their money from one loan to another or move from one group of lenders to another. Of course, lenders earn interest when they lend.
The entire process is done by the owners. CRYPTOCURRENCY. Furthermore, anyone who owns cryptocurrencies can borrow against them, and can also lend to others based on the value of their coins. Ethereum is known as the most important decentralized financial currency, which is known as DeFi for short.
The field of decentralized finance has achieved significant growth in the previous period. By May 2021, $ 80 billion worth of cryptocurrencies were being used within DeFi networks. A year ago, this amount did not exceed one billion dollars.
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