Bitcoin and other forms of cryptocurrency have been taking over the world’s finance systems in recent years. This has come due to their decentralized nature, as a single authority does not control them. Transactions on a blockchain network are very fast and take a short time to complete. For instance, when you look at NASCAR betting odds and make a wager, you can easily win with crypto betting.
A transaction based on a central bank system is easy to fail due to many issues such as failure of the system or unverified transactions. Satoshi Nakamoto introduced bitcoin in 2009 and proposed a digital currency system that was decentralized steam that solved the double-spending problem.
Decentralized Finance (DeFi)
The decentralized finance system is a word used to describe financial services not controlled by a central authority. In this finance system, the users can borrow, spend, exchange, and insure without the need of a central authority.
Bitcoin was the first form of decentralized currency, and any form of government does not control it. The traditional finance system solves the double-spending problem where money can be replicated and reused by having a central authority verifying transactions. The central bank verifies the transactions, storing the information on transactions in a central computer.
Satoshi Nakamoto’s white paper explained digital money to solve the double-spending problem without a central authority. Bitcoin is the first form of a decentralized system that uses a transparent ledger to store transactions without the need for a central authority.
Decentralized money systems use software programmed to perform automated activities such as exchanges, lending services, and insurance without a central authority.
Components of DeFi
Decentralized financial systems are created on programming infrastructure and a decentralized system. The Ethereum network is a decentralized network built using blockchain technology to run decentralized applications.
Ethereum allows the writing of automatic code that runs on itself and can be used to manage any financial services in a decentralized manner. The rules of how a service should be done are written on a program, and after deploying the program in the network, it cannot be controlled.
The most important element of a financial system is a currency to run on. Bitcoin and Ethereum are the most common cryptocurrencies in the world financial markets. Bitcoin is a decentralized currency that is not compatible with the Ethereum network, making it unsuitable for use.
Bitcoin and Ethereum are very volatile as their values in the market fluctuate very fast. The basis of a good currency for a finance system is stability. This introduced StableCoins, which are cryptocurrencies whose value is linked to a real-world currency.
StableCoins make cryptocurrency very convenient and stable without a central currency regulator. StableCoins are mostly used for exchange for purchases and trading. Cryptocurrency traders exchange their volatile currency for this currency to lower the risk of a volatile currency.
StableCoins transactions are very fast and cheaper than real-world money transactions. DIA is a decentralized cryptocurrency whose value is attached to the US dollar. It is backed by crypt collaterals that are open to the users to be viewed in the blockchain.
If you have Ether, a volatile cryptocurrency, you can exchange it for DIA, a stable currency. You can also lock up your Ether for DIA during market fluctuations. When you require your Ether back, you pay the value of the DIA you borrowed to unlock your Ether.
The DIA stable coin is a smart contract on the Ethereum network, making it a trustworthy decentralized stable coin. DIA provides a decentralized finance system with a stable currency that can allow for morse services.
Decentralized Exchange (DEX)
The decentralized Exchange systems operate based on a set of rules called smart contracts that allow them to self execute. These applications allow users to buy, sell and trade cryptocurrencies.
Trading on a DEX, the user information is not required, no sign-ups and withdrawal fees. It is free for all as smart contracts handle the transactions. The risk of your account being hacked is reduced as there is no need to transfer the currency into an exchange account.
Advantages of DeFi
DeFi systems offer users transparency of the money exchange systems as they can go through the transaction ledger. The system is free for all decentralized systems that allow users to exchange and transact freely.
DeFi systems are just starting, and their risk is unknown as things can go wrong. Smart contracts have faced loopholes that hackers can take advantage of.
DeFi and the crypto market hold huge potential as more technological advancements stabilize the networks and systems. These decentralized systems offer a big part of the population suffering from financial discrimination and option.