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What are DeFi services and how can they benefit you?
Imagine you want to open a bank account and are deciding which bank to choose. You may find that some offer you a higher interest rate on your money while others provide free teller services.
Sending and receiving money or paying for something online is a small fraction of the financial services a traditional brick and mortar bank offers you. At a traditional bank, you can borrow, lend, and earn interest on the money in your account, invest, trade, buy bonds or derivatives, and also benefit from portfolio management suggestions.
When the first cryptocurrency, Bitcoin, was created, the financial services available for cryptocurrency were very limited, and mostly related to sending and receiving money. However, over the last few years, people have significantly pushed the envelope of what they can do with cryptocurrency.
Cryptocurrency transactions are stored in a blockchain, and the community is building various blockchain protocols to offer a host of different financial services. Some of these financial services may be similar to those offered by traditional banks, while others may be completely new in the marketplace.
- The nature of blockchain technology is that transactions are stored across many locations in a decentralised manner, earning the name "Decentralised Finance" or "DeFi" for short.
In short, DeFi is the term used when explaining how cryptocurrency and other blockchain-based finance applications operate.
Disclaimer
This article is over two years old, last updated on August 1, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent cryptocurrency articles.
What is the need for DeFi?
Using traditional financial services requires us to trust that the banks are working in our best interest. However, DeFi is open source and borderless, and it's also trustless, meaning that all parties come to a consensus on what the truth is, rather than trusting a central authority to declare what the truth is.
We may take it for granted in Australia, but traditional finance is not available to millions of people in the world simply because they may not be able to open a bank account. DeFi, however, is accessible to anyone with an internet connection making the service equal for all. In decentralised finance, services are essentially available all the time and not only within working hours.
Removing the need for approval by central authorities could potentially make transactions instant, borderless, and more economical in the long run, reducing transaction time to almost nothing and saving on transaction fees in the process.
For example, in the world of DeFi, it may be possible to ‘stream’ money to an account, meaning that you could receive your salary by the second, rather than only at the end of the month. You could also borrow money from a single account, as is done traditionally, or borrow from a pool in which many lenders have provided funds.
Where can I find DeFi services?
DeFi is constantly evolving, and innovators in the community are pushing the boundaries rapidly. As more solutions become available, experts try to predict the blockchain of the future.
Will it boil down to a single option, or will there be several strong ones? We can’t say for sure. But what we know is that many of the emerging financial services, including DeFi, have the potential to change the financial landscape forever.
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