What Are DeFi And DeFi Derivatives | A Guide For Beginners

What Are DeFi And DeFi Derivatives

With the evolution of technology, there has come a revolution in the finance market. The transactions once controlled by centralized authorities such as banks are now going decentralized. We know the concept is relatively new, so here we are with the guide on what are Defi and Defi Derivatives.

DeFi offers faster transactions, secure payment options, and eliminates transaction fees. Not only this, but the DeFi derivatives also provide you with options like hedging and speculating. Now you must be confused about What are DeFi Derivatives and their usage in decentralized finance?

So, we are here with a detailed article that has covered everything related to the topic. So, let’s not waste much of your time talking and start with the post.

What Is DeFi?

DeFi Stands for Decentralized Finance. It is an upcoming finance technology that works on the same principle as cryptos. Yes, you got that correct, the “blockchain technology”.

Blockchain in simple words can be explained as the secured distributed ledgers that provide extra security to the data stored in its block. 

The DeFi system or the decentralized finance system removes the centralized authorities such as banks or money institutions. The control is directly shifted into the hands of the users, and hence, the transaction is completed without any delay.

Understanding DeFi could be quite confusing as the term is relatively new. So, let us understand Decentralized finance by comparing it with centralized Finance.

Centralized Finance

Centralized Finance, on the contrary, is the finance system that has a central authority to control all the transactions being made. The most prominent example of centralized authority is the Banks.

Centralized Finance works like this: You purchased an item using credit. The merchant will send the charge to your acquiring bank, and the bank will send the details to the Credit card company. The Credit card company will clear the charges and seek payment from your bank. 

The whole process forms a chain, and every next step depends on the previous step’s approval. Each entity involved in the transaction receives money as the service charge.

So, you can say that if you are using the centralized finance system for business purposes, then you need to pay more than the actual amount as the service charge, plus the process is lengthy and time-consuming.

Decentralized Finance

As we said earlier, the DeFi or Decentralized finance also removes the centralized authority from the transaction process. That means no more monopoly of the banks and the monetary institutions. 

The DeFi system removes the intermediaries we came across in the centralized finance system above. It allows people to conduct transactions in peer-to-peer financial networks without including the bank or any central authority.

The DeFi system uses the most advanced hardware technologies, software, connectivity, and security protocol. You only need to have access to the internet and that’s all. The blockchain ledger is available to all, and anywhere you can access it and make transactions.

The blockchain database is accessible to all, and this is the feature that makes it one of the most secure technologies for financial transactions. 

We know you must be having several queries running in your head right now. All of them will be cleared after you understand how the DeFi system works.

How Does DeFi Work

To understand the working of Decentralized finance, you need to know the underlying principle on which the whole mechanism works. The blockchain can be called a public ledger that can be accessed using dApps. These dApps are run on the blockchain and handle transactions.

There is a reason why this transaction network is called a blockchain. Because the transactions are stored in the form of a block, both the users and the receiver initiate the transaction on the block. After the other user verifies the transaction, the block is closed. 

Not only is the block closed but it is also encrypted. The next block created will have the information about the previously closed block. So, it becomes difficult to alter the transaction record.

Every new block has information about the previous block, and a chain is created.

DeFi Derivatives

One of the most important features of Decentralized Finance is the DeFi Derivatives. A derivative is something that could be found in Centralized finance as well. 

In the traditional finance system, a derivate is a contract that derives its value from the performance of an underlying entity. This entity could be an asset, interest rate, commodity, another derivative, or index.

Just like the derivatives in Centralized finance, we have the DeFi derivatives. These are used for leveraging crypto blockchains. The best thing about the DeFi Derivative is that it does not have any middleman involved in it. Generally, the bank plays the middle person in centralized finance.

Just like the traditional finance methods, there are two use cases of DeFi derivatives these are 

  • Hedging
  • Speculating

If you are looking for the best DeFi derivative projects in the crypto sphere, we are here with a few names. 

  1. Horizon Protocol
  2. Horizon Genesis
  3. Horizon Exchange

Wrapping Up

We hope that our guide on DeFi and DeFi Derivatives has cleared all your doubts. There is no doubt that the decentralized finance approach using blockchain technology is far better than the traditional banking methods that are being followed. What are your views on this? Do tell us in the comments section below. Also, if you have any doubts or queries in your head, feel free to ask us in the comments section below. We will reply to you as soon as possible.

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