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What is Defi? Explained like you are a 5 years old!
'As so many new people have joined crypto and this sub, I thought of reposting one of my informative posts. I hope it helps you learn a few things. Pass it forward.'
What is Defi?
Well it stands for Decentralised finance.
In the past we have always used centralised finance.
Which is where there's a central authority that controls the flow of money.
The government and the banks control it.
They don't really say they do but they do they can print more of it if they want to.
They can stop you from borrowing it if they don't want you to.
They can even stop you from having a bank account
The alternative is Decentralised finance, Defi, where there are no banks, instead there are pieces of code that run and act as a bank.
They're open to anyone, They don't require you to trust them because they're literally a piece of code running a program.
If you wanted to you could read through it and verify that it's not going to scam you.
They are also censorship resistant and lastly they are much much cheaper than traditional centralized finance.
Decentralised finance is built on three main things,
Five Pillars of DeFI,
So first off we need to understand the bridge of decentralised finance to centralised finance and that is, cryptocurrency that is matched to a real-world asset.
For Example,
Dai, Tether and USD coin are all what we call stable coins.
This is because their price is tied to the united states dollar.
Think about it like this when you buy one for one dollar
a new USD coin is minted when you withdraw one, a USD coin is burned, so the coin is always worth one united states dollar.
Now the purpose of this is to have a reliable way to buy and sell certain coins without having to
buy and sell them.
So another important pillar of decentralised finance is lending and borrowing.
In fact a huge part of our current financial situation in the world is based on lending and borrowing money so it would make sense that the blockchain could do it better, Using Code, with complete anonymity.
So I have a friend who traveled to london a few years ago from the United States, now of course in london the standard currency is pounds while in the US it's dollars.
So naturally he had to visit a foreign exchange booth and trade out his dollars for pounds, unfortunately for him the fee was like 15 so he immediately lost 15 percent of his money.
Because that's what foreign exchange traders do. Tourists don't know any better and they need local money so what they do is they take advantage of these people.
Well when it comes to Decentralised Finance, Instead of a foreign exchange trader we have what is called a Decentralised exchange, where you can exchange your coins and tokens for other coins and tokens.
Now the fees are usually very small like less than half of a percent which is a great benefit for anyone who regularly wants to trade their crypto assets.
In today’s volatile market, Collateral Protection Insurance provides borrowers and lenders with a sense of security from crypto lending networks, which is a critical step in advancing blockchain adoption.
DeFi crypto margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. Usually broker in DeFi it’s one of autonomous money markets.
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Manage all your crypto, NFT and DeFi from one placeSecurely connect the portfolio you’re using to start.
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