Recently, I’ve noticed that many people unfamiliar with blockchain struggle to understand the concept of decentralized finance (DeFi). As someone who has spent years in the industry, I sometimes forget that not everyone is knowledgeable in DeFi. So, I’m going to break it down for you in simple words, using the Explain It Like I’m 5 approach.
In a nutshell, decentralized finance takes traditional financial activities like lending or currency exchange and puts them on a blockchain. A blockchain is often referred to as a decentralized digital ledger, which is why we call it “decentralized finance.” One of the biggest benefits of using blockchain technology is cutting out the middleman, like a bank, from the financial transactions you make.
Here’s an example to illustrate my point. Imagine you want to convert 100 USD to EUR. If you use a conventional bank app to make the exchange, you’ll likely encounter two issues: a less favorable exchange rate and high fees. That’s because the bank acts as a middleman, taking a cut for its services.
In contrast, if you make the same currency exchange on a decentralized platform, you get the market rate—exactly what you’d see on Google or Yahoo Finance. Plus, the transaction fees are minimal, usually around 0.3%, just enough to maintain the system’s operations.
That’s just one example; DeFi has myriad use cases that provide similar benefits. I hope this clears up some of the mystery surrounding decentralized finance for those new to the tech.
TLDR
DeFi is like a special money helper on the computer. It does the same things as banks but doesn’t take as much money from you. Banks have a secret fee, and we don’t know where it goes – maybe to keep the bank happy or maybe to be greedy.
But with DeFi, it’s like a see-through piggy bank. You know where the money goes. It helps the computer money system stay strong, and it doesn’t take a lot of your money. It’s like a fair friend for your money.
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