Search the Community

In the case of traditional financial systems, they are centrally regulated as central banks control the supply of money and financial institutions actively monitor customers' financial activities. Human beings by nature, always seek freedom, and hence cryptocurrency and Decentralized Finance(DeFi) systems were invented to give financial freedom to everyone. Let's imagine, you should not have to open a bank account and you have full freedom to control your financial activities like savings amounts, tradings, loans, insurance, and many more. Your financial activities will be accessible worldwide just by using a smartphone/PC with an internet connection. Yes, these all things are now made possible with a modern DeFi system. DeFi platforms are majorly based on the Ethereum blockchain network. Some of them also belong to other public blockchain networks but in this article, I am going to talk about Ethereum blockchain-based DeFi system. Before diving into a definitive guide to DeFi, you need to know some most important DeFi applications built on the Ethereum blockchain network which are responsible for operating services without middlemen on DeFi platforms and DEXes. Smart Contract:-It is a self-executing contract in which codes are stored in blockchain for validation. It does not need middlemen as cryptography enforces it to perform the tasks. DApp:-It is an open-source application build on the Ethereum blockchain network that runs in a distributed computing system(p2p network). What is DeFi? It is an open financial system and fastest-growing sectors based on a blockchain network with key characteristics like permissionless, non-custodial, and transparent. It has no middlemen or central authority so every activity is managed by decentralized applications like smart contracts and DApp. There is no single inventor of DeFi however the first major DeFi platform MakerDAO was created on the Ethereum blockchain network and Ethereum was invented by Vitalik Buterin. Once DeFi platforms are created, they are controlled by community members all around the world as information and data will be equally distributed to all participating nodes(a cluster of a computer) so there will be no single entity or person however core developers can be rolled out to fix the bugs on DApp that is another matter for discussions. According to current data, the total market cap of DeFi is $15 billion. What are the things which inspire users to trust DeFi ? I'd like to write them pointwise so that you can easily get the crux of the matter. Cryptography in a blockchain network enforces smart contracts and DApp of DeFi to perform tasks based on the instruction provided and validated by a cluster of computers from community members all around the world so no human intervention is required. It is open-source and code is transparent. Everyone has the opportunity to detect bugs on the smart contract. Additionally, all transaction records are public to all participating nodes. It is permissionless that means all users have equal opportunity to access DeFi services from all around the world. Smart contracts handle everything so you need not trust anyone. Comparison between DeFi and CeFi(Centralized Finance) How does DeFi system work? Source:-rsk.co DeFi risks and challenges DeFi sector is still in the experimental phase but more innovations are still going on. Here are some most notable risks and challenges for DeFi If a malicious user detects the bugs in smart contracts, he can easily drain out a huge amount from DeFi platform. Recent bZx DeFi platforms hack indicates the growing pain in DeFi space. If bugs are seen in DApp, fixing the issues is complicated as all users should update the application. Criminals can misuse DeFi platforms to circulate the black money Conclusion:-Some downsides and risks are involved in DeFi but developers are working hard to make the safest architecture for DApps. In the future, I believe DeFi will be at the next level. P.S. Graphics and contents from this article can't be misused without prior permission from Cryptotalk forum and author. Thank You !