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Understanding Decentralized Finance (DeFi) As a Concept

14 October 2021 18:10, UTC

Decentralized finance, also called DeFi, refers to different projects and applications in the public blockchain whose goal is to disrupt the conventional finance world. Blockchain technology inspires decentralized finance. Being a decentralized virtual currency means Bitcoin operates without a single administrator or central bank. Instead, this digital currency uses a peer-to-peer network without intermediaries.

Nodes in the network verify transactions via cryptography and record the details in the blockchain or public, distributed ledger. Satoshi Nakamoto introduced this virtual currency back in 2008, and people started using it in 2009 upon its implementation as open-source software.

Today, people trade this digital asset on platforms like bitcoin evolution app for profits. You can also access this virtual currency via such crypto exchanges. That means banks are not the only custodians of currencies. Anybody can access cryptocurrencies by registering with such platforms and purchasing them with fiat money. Thus, cryptocurrencies like Bitcoin have changed how people perceive money.

Centralized vs. Decentralized Finance

Most countries use the fiat currency model. That means the central bank holds the currency value of such countries. What's more, the willingness of the central bank to honor the obligation backs this value. Ideally, this value exists with the central bank only, meaning it defines it. Therefore, the central bank can adjust this worth to meet specific funding goals or obligations. And this is sometimes detrimental to the end-users.

Bank instruments like deposit certificates and bank transfers, coins, and paper bills represent the value of the physical currency. Although fiat currency represents equal value ownership at the bank, it doesn't leave this institution unless it goes to another bank. In simple terms, the central bank controls the value of the money you keep in your pocket. And this bank doesn't always act in your best interest.

Decentralized currency like Bitcoin is different. The currency's coin represents the value of a decentralized currency. And this is an encrypted computer code whose reproduction is complex, yet its verification is easy. A coin has a public key anchoring it to a hosting blockchain and a wallet's private key inferring ownership, and it's in the owner's wallet.

A coin's private key or the "coin" is transferrable peer-to-peer. That means you only need a recipient whose wallet is compatible with the cryptocurrency to send it to them. The current Bitcoin demand determines the coin's value without influence from a central authority. Thus, the end-consumer conveys the value of the currency, and nobody can change it inorganically.

Why Bitcoin's Decentralization Matters

Without decentralization, Bitcoin could lose its essential qualities of being censorship-resistant and permissionless. Currently, anybody can use Bitcoin to pay for services and goods or trade them. After all, Bitcoin's decentralization primary aim is to provide non-discriminatory, open participation with an immutable ledger. Essentially, decentralization is the only factor that gives the Bitcoin network these qualities.

But some people wonder how decentralized a cryptocurrency should be as some move towards centralization. Unfortunately, nobody knows the safe decentralization level for Bitcoin. What's more, decentralization is not easy to measure, and it's multi-dimensional.

Final Thoughts

Bitcoin's decentralized finance has introduced new possibilities for money functionalities via the distributed ledger's innovation. Today, the human population is shaping a global financial system. And everybody can participate in the decentralized finance governance protocols and activities. What's more, the decentralized finance space is catching up with the conventional financial system. Although it's facing obstacles, the decentralized finance world is on the success path. Thus, predicting how decentralized finance will shape the future of financial services is not easy. Nevertheless, Bitcoin's decentralized finance creates a space where people can access, transfer, and use funds fast, secure, and affordably.