What is Decentralized Finance?

by Misha |
 Nov 19, 2023
Decentralized Finance simplified

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.

If you’ve liked the article, I’d highly appreciate it if you shared it on your socials. Stay tuned for more!

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