Decentralised Finance (DeFi): What it is and how it works
The world is changing. So are the rules of finance, and the way financial transactions are conducted. Cryptocurrencies and blockchain technology have certainly made a huge impact on the world of finance and the way we buy, sell, and invest. But it is not just cryptocurrencies and blockchain technology that are changing the rules of finance. Numerous companies have taken a step into a new world of finance – decentralised finance. This growing trend is comprised of new blockchain-enabled technologies that allow people to invest and transact more freely than ever before.
How does it work?
DeFi can be thought of as a parallel financial system that is not managed by central institutions such as banks. It is an emerging ecosystem for managing financial assets on the blockchain. The goal of the DeFi platforms is to provide alternatives to traditional banking allowing individuals to take control of their finances.
In a decentralised system, money can be converted into what's known as a stablecoin. These are digital replications of the euro, US dollar, or other fiat currencies. Since the value of the euro does not change that quickly, stablecoins provide stability in the cryptocurrency market. These stablecoins can then be lent out and interest can be generated on them.
At Coinpanion the stablecoin part of the 'cautious' and 'balanced' portfolios generates consistent returns for you and lowers the risk of your portfolio. Your interest is paid out daily and there is no minimum term.
Not that different from your bank
With a savings account, you give your money to the bank to hold it for you. However, this money is not just sitting there but is used by the bank to grant new loans. While providing your money, you receive an interest rate.
In the decentralised system, interest rates are determined by supply and demand. With more demand than supply, you can earn high interest-like returns, all without any intermediaries. With DeFi lending and borrowing, control is given back to the people who decide how to use their money. Blockchain technology assures a high level of security and transparency and functions as a guarantee for both counterparties in the peer-to-peer lending system.