What is DeFi in cryptocurrencies?
A DeFi protocol is a system that offers a financial service through the exchange of a crypto asset. Its advantages include decentralization, security and automation.
Currently, most DeFi Development projects make use of the protocols of the Ethereum network, a system widely known for the coin of the same name.
Some of the newer uses of DeFi platforms include decentralized exchanges, money lending, interest generation, the use of digital representations of physical currencies, and the creation of investment funds.
At eToro, we explain the most important technical elements of a decentralized finance application in the following sections:
Smart Contracts
A smart contract, or intelligent contract, is a protocol that executes an agreement between two or more parties automatically and without the intervention of third parties. These allow the performance of services such as transfers or payments without the additional services of a bank or any other centralized entity.
DApps of the DeFi world
Decentralized applications (DApps) are a type of software built on a decentralized network; for example, Ethereum. These offer an interface in which users can interact with each other through smart contracts. In addition to their versatility, DApps offer basically the same features as any traditional application.
Decentralized Exchanges (DEX)
A decentralized exchange is a platform that allows the transaction of digital assets such as cryptocurrencies. It works in a similar way to a classic stock market, only it works through crypto assets.
How is the DeFi world different from traditional finance?
Surely you still have doubts about what DeFi is and its differences with current financial services. For this reason, in the following section we offer you a brief description of the most important characteristics of this system.
Fewer Human Errors
DeFi cryptocurrencies are based on smart contracts, which are executed independently and without the participation of external agents. Due to the above, errors related to human intervention are very rare. Once a contract is made, it is executed automatically based on computer protocols.
DeFi platforms are more transparent
Most cryptocurrencies work through democracy, offering their code openly and allowing users to participate in decision-making. On the contrary, many centralized entities operate under private interests and there is little participation that the user can have in governance issues.
24/7 access from anywhere
One of the main objectives of the first crypto assets, such as Bitcoin and Ethereum, was to operate internationally. DeFi cryptocurrencies inherited this feature, which is why most applications are accessible from anywhere in the world through a stable Internet connection.
DeFi does not have bureaucratic procedures
If you already have experience in the banking system, you are surely familiar with some of the requirements to carry out certain types of operations. However, investing in DeFi requires few permissions and does not require compliance with complicated requirements to start trading.
Flexible User Experience
Thanks to its ease of access, its decentralized protocol, its democratization and its customization, DeFi currencies offer a service that is highly adaptable to the needs of the user. If you have advanced programming skills, you can even go further and create your own app or custom token.
Defi Modular Solutions
Contrary to traditional finance, DeFi Development Services solutions are not static. In fact, it is possible to create new DeFi apps by combining different products, just like Lego chips. That means the possibilities for new products and services are only limited by your imagination.