Understanding Decentralized Finance For Beginners
Have you ever imagined getting loans, insurance, and trades without the central bank? We know what you’re thinking. You’ve all experienced lending money from banks and other lending institutions with expensive interest rates you couldn’t avoid due to the authority of these financial firms to set the rates. Thanks to technology developments, gone are the days where you have to suffer from high bank interest rates. With decentralized finance, you can do so much more with your money, whether you are a borrower, a lender, or an investor.
If you’ve just heard about decentralized finance, here’s everything you need to know.
What is decentralized finance?
Decentralized finance, known as “Defi,” is like a new version of traditional finance, minus the centralization. In decentralized finance, there is no central bank regulating how interest rates are determined. There is no one controlling the system, making it more preferred by investors who want to skip the KYC requirement due to information confidentiality.
What can you do with decentralized finance?
There is a lot to do with decentralized finance. For example, suppose you have been borrowing money, investing in a peer-to-peer lending platform, or putting your money in insurance to grow. In that case, you can easily understand how decentralized finance works.
The first thing you can do with decentralized finance is to invest your money. How? By joining decentralized exchanges with different projects. For example, a decentralized exchange like Soldex offers an AI-powered trading system where people can buy and sell cryptocurrencies with artificial intelligence, making it easier for them to make money from crypto without expert trading knowledge.
What makes decentralized exchanges more favorable is that they are cheaper compared to centralized trading platforms. They also don’t have KYC requirements for safety purposes. We all know that identity theft online is such a big deal. Everyone wants to protect their data!
Another thing you can do with decentralized finance is to lend and borrow money. That’s right; it’s like a bank or a financial institution with no banks involved. Instead, it has a decentralized system where the process is determined by the community of token holders and users. So, instead of a bank setting the interest rates when you borrow cryptocurrencies, the supply and demand determine the rate in Defi.
Some blockchain protocols are designed for borrowers. Some cater to both lenders and borrowers. In some protocols, lenders can put their cryptocurrencies in a “pool,” and borrowers will get the crypto they loan from that pool. In this way, lenders can have equal access to rewards while protecting their money from fraud and scams.
Is decentralized finance better than traditional finance?
Compared to traditional finance, decentralized finance has new things to offer, decentralization and ‘KYC-less’ being the ultimate advantages. If you want to borrow crypto and you want to skip the process where you have to submit your identification IDs and bank and credit card details, then decentralization might be the system you are looking for. On top of that, no one is in control. Everything depends on the market, which relies on demand and supply. But this doesn’t mean that the absence of regulations is a threat to the system’s security. In fact, blockchain protocols today are so innovative to adapt a tightened security system.
How do you earn from decentralized finance?
One way to earn from Defi is to join decentralized exchanges, which is a better version of conventional centralized exchanges. In the case of Soldex, anyone can invest their money in crypto by using artificial intelligence to determine the market condition and risks. With AI, a user doesn’t need expert trading skills to participate. They can rely on the program curated by experts in the field.
Apart from buying and selling crypto, there is also a Proof of Stake process, where you can earn from lending your tokens to the network. Staking is like depositing your money in a bank account where you get a reasonable percentage of interest after a certain period. What makes staking preferable over buying and selling crypto is that there’s no need for you to monitor the market daily. Your rewards are in the form of tokens, SODX, for example.
There’s also an option to participate in Proof of Work, which is different from Proof of Stake. Proof of Work is generally mining. This is where you use high-end computers to help the network generate new blocks. This is expensive for some investors, especially those who can’t provide computer systems yet. If you can’t afford to contribute expensive technologies yet, you can participate in staking to earn money in the meantime.
Understanding decentralized finance is helpful for beginners. If you are looking for money-making activities on the blockchain, knowing the basics will help you discover things that you can’t find by searching on Google alone.
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