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DeFi for Humans: Breaking Down Decentralized Finance

Okay, in keeping up with the habit of explaining the stuff I am learning, it's time to give a brief explanation of what DeFi is. DeFi is nothing other than a financial system built on blockchain technology. By now you should be aware of the core concepts of blockchain — decentralization and cryptography. 

This means it's bound to inherit the core characteristics of the machine it's built on. In fact, the word "DeFi" is an acronym for the words "decentralized finance" — cool right? It gets better.

Essentially the goal of DeFi is to bring existing financial systems on-chain, making them automatically transparent and, most importantly, permissionless. I can't stress enough the feeling of no one having control over my finances, but that's just me.

With that out of the way, let's try understanding the "building blocks"  — see what I did there? I'm so cool —  of the DeFi system. DeFi, when peeled back like an onion, is essentially smart contracts composed together in order to form protocols. These protocols are nothing other than dapps — decentralized apps —  built on the blockchain, and they offer different services to their users.

These smart contracts are just code that have certain instructions, and once deployed can't be changed (kind-off). This takes away the needed trust in a third party and puts the trust in algorithms. When dealing with the CeFi world, that is, our already existing centralized finance, we put our trust in institutions that give us some level of peace in our day-to-day transactions. But that peace comes with costs. Monetary, with fees and maintenance. But there's also a psychological cost — the cost of having someone else dictate the goings-on of my finances, which just doesn't sit well with me.

DeFi is still just in the beginning, but we can already lend and borrow money, trade, and gain interest by just staking our money —   sometimes earning 5% APY on stablecoins versus 0.5% in a traditional savings account. As I go deeper into some of the already existing possibilities, I will definitely share them with you.

Happy learnings,

s02minu

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