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Decentralized finance is a new-age financial system based on blockchain technology. It relies on market forces for valuation, unlike the traditional financial system, which has central intermediaries. This overview of decentralized finance sheds light on its history, basic technical operations, and its difference from the formal financial system. It also touches on the relationship between DeFi and crypto, and the projects surrounding the concept.

DeFi Definition and Why it Matters

The liberalization of economies and cross-border trade makes the price of money elastic. The price of commodities fluctuated based on the price of the US Dollar. It increased the cost of business, especially for business people who have to change their currency into USD or the Euro. In essence, the respective central banks are the go-between the producer and consumer. They dictate the price of money based on controlled monetary policies.

Financial engineers came up with an alternative system that had independent valuation parameters. It does not have a central control system that dictates its worth, neither does it have a physical trading outlet. The more the demand, the more the value, eliminating the intermediary. This is the concept behind decentralized finance, and Ethereum is a good example.

The system uses blockchain, one of the most secure online cryptographies, to manage the transactions. Each transaction happens in crypto-based blocks that require several authorizations, making it safe. Decentralized finance allows lending, price speculation, trade with other cryptocurrencies, and earns interest for savers.

DeFi General Overview and Properties

Blockchain

It houses all transaction details and statements of accounts.

Processes

It has protocols that guide transaction functionalities without human interference.

Currencies

The store of value or tokens; cryptocurrency (Ether, Bitcoin, etc.)

Platform

The applications with instructions that are used to manage crypto activities

DeFi Projects from Inception To Date

Bitcoin is the first decentralized financial project dating back to 2009. Its concept paper is the yardstick that other DeFi Projects base on. The peer-to-peer transaction network and its blockchain-based ledgers open up the system to anyone but still maintain user anonymity. Simply put, DeFi general overview and structure borrow heavily from Bitcoin.

However, MakerDAO is the first modern-age decentralized financial platform to receive significant traction. Stablecoins were its resident cryptocurrencies, which allowed lending to its users. Ethereum worked on the concept using Ether as their cryptocurrency, and as it stands now, it is the most recognized DeFi platform in digital finance. Most DeFi projects grew to offer loans, manage repayments, and liquidation processes.

The Difference Between DeFi and Classic Finance

Whereas both financial systems serve the same purpose, every system has its technical and operational approach. Some of the notable ones include:-

• Ownership - in a classic finance system, financial organizations like banks hold your money. You keep your own money in a decentralized financial system and also have a say in where your money goes. In a classic finance setting, the bank can use your money for their investment without your permission.
• Transactions Process - users can move money from one wallet to another is decentralized finance in minutes. The classic system requires manual authorizations, which might take days to complete the transaction.
• Registration - once there is the internet, anyone can sign up anywhere in the world. However, you must be a resident of a particular country to register to use classic finance services formally.
• Accessibility - markets are always open on DeFi, while classic finance opens and closes outlets since most transactions are manual.
• Technical set-up - Decentralized Financial systems operate on transparency where any user can access the growth data and how the system works. However, the classic system operates in secrecy. Customers cannot access sensitive details like the balance sheet, loan history or assets.

DeFi general overview shows a system driven by users. They determine its value, volume and can directly manage their wallets. On the other hand, the classic finance system operates in a closed system governed by institutional policies.

Uses of Decentralized Financial Systems

1. Money Supply - blockchains offer secure platforms where users can send and receive money from all over the world. All users have to do is write the recipient's ENS number. The system processes and delivers the funds, a process that takes a few minutes. For this to happen, the sender and the recipient must have a crypto-wallet.
2. Access to Stablecoins -cryptocurrencies are volatile since their value is a function of market forces. However, decentralized financial systems have Stablecoins whose valuation is pegged on stable currencies. It maintains the value of the crypto, especially when you want to convert to traditional currencies.
3. Loaning - users can access peer-to-peer or pool-based lending services. Compared to the traditional loaning services, the borrower doesn't have to reveal their identity. The loan pool is bigger, and the taxation model is customer-friendly. The system also provides flash loans in exceptional circumstances, which don't require collateral.
4. Cryptocurrency trading - if you are an ardent crypto-traders, decentralized finance provides a trading platform. Features such as marginal trading and limits shape crypto-trading and control the amount one uses on the platform.
5. Crowd-funding - the system is an excellent platform to source funds for a start-up or expanding a venture. The system is transparent, enabling fundraisers to see the total amount collected. It also has other features such as refunds and deadline, which guides the funding process without manual intervention. More importantly, donors can come from anywhere in the world, thanks to decentralization.
6. Savings - if you save on decentralized financial systems, your crypto earns interest if another user borrows. It also has a PoolTogether initiative where several users save their monies. The growth of the crypto translates to improved valuation to your savings, making the exercise worthwhile in the long run.
7. Growing and Managing Crypto portfolio - DeFi general overview is on fund management, especially cryptocurrency. You can configure the system to manage your crypto portfolio without necessarily being physically there. It applies to nearly all DeFi examples.

DeFi explained simply is a perfect alternative to a commercial bank without regulations or actual tellers. It offers all the services one can get in a physical bank, although no one controls its activities.

What's DeFi Shortcomings?

Although the explanation of DeFi is glittered with modernity and financial independence, there are few issues with the system.

Uncertainty – be it system or market uncertainty, any element destabilizing the system or the crypto endangers its reliability.

Liquidity – although its market capitalization is growing, DeFi general overview makes it inferior to the centralized financial systems. It might take time to be a significant threat in world finance.

The hands-off approach is sometimes detrimental to DeFi’s growth. The system doesn’t solve all teething problems. Any slight mishap can cause significant damage to the system, which can affect its reliability.

DeFi explained simply is a global, unregulated financial system that gives its users the power to determine its valuation. Its origin is Bitcoin’s concept paper, although MakerDAO is the first decentralized finance system. As the crypto economy continues to grow exponentially, it brings bigger DeFi projects onboard.

The main difference between the classic and DeFi examples is regulations. Whereas classic finance requires institutionalized policies, it works with demand and supply.

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