Hi everybody!
I will try to explain little bit about Decentralized Finance (DeFi) and How does it works.
Before going into learning DeFi, First we must know what the Traditional or Centralized Finance is and How it Works.
What is Traditional or Centralized Finance and How it Works:
Lets understand with an Example:
For Example. There is a Person named Abbas and he is having extra money with him and he want to earn interest on his money. Now for earning interest on his money, Abbas can deposit this money into bank through different interest giving schemes. Where bank will take Abbas’s money and in return bank will give him monthly or yearly interest.
On the other hand there is a person named Hamza. He want to start a business but he hasn’t much money to start business. Now Hamza can go to bank and put his Land, Car, House etc as Mortgage to get money from the bank to start business.
Here the bank will take money from Abbas with Lower Interest Rate while Giving Hamza with a Higher Interest Rate. This is how the traditional Finance works where the banks are centralized trust parties who borrow or lend money with responsibility.
What is Decentralized Finance (DeFi):
As Banks are trusted parties in Traditional Finance so Banks are Replaced with smart contracts in Decentralized Finance. Unlike Banks, Smart Contracts are 100% transparent and follow simple rules that are coded in that smart contract. Everyone can verify the code before investment to check if the Smart Contract is right or wrong.
Crypto Assets (Bitcoin, Ethereum) are used in place of real world assets i.e cars, lands etc in DeFi.
How DeFi Works :
For Example Abbas have crypto assets and he want to earn interest on his crypto assets, so Abbas can deposit his crypto assets into DeFi smart contract and in return he can earn monthly or yearly interest.
On the other hand is Hamza, who needs urgent money. Hamza have some Ethereum but he doesn’t want to sell his Ethereum. Here Hamza can put his Ethereum into DeFi Smart Contract as Mortgage and in return can get money and when the time comes, he can pay the loan to get back his Ethereum.
Smart contract will charge interest on loan from Hamza where it will be paid to Abbas for his Deposit.
Difference between CeFi and DeFi :
| Centralized Finance (CeFi) | Decentralized Finance (DeFi) |
|---|---|
| KYC | No KYC |
| Country Limited | Global |
| Censorship | No Censorship |
| Closed | Transparent |
DeFi is not only Limited to Lending or Borrowing, There are many other Services or Protocols on DeFi like Decentralized Exchanges, Derivatives, Payments, Assets etc
DeFi has Limitless potential and it is the future of finance.
What Are Crypto Collectibles and Non-fungible Tokens (NFTs)?
Now I will try to explain little bit about Non-Fungible Tokens (NFTs) in this Article. If you have an idea of NFTs already, then give this post constructive advice while keep on reading if you’ve no idea of NFTs.
First we need to know the difference between fungible and non-fungible that what does these terms refer to, then we can go much deeper into the context about the use-case of the NFTs.
Fungible
Any asset, commodity or good that is Traded, Exchanged, break down into simpler units or easily convertible into the same commodity or asset is called Fungible Asset. Fungible commodities can be traded or interchanged.
Examples are Digital Currencies, Gold, Oil etc
For instance, if you have added 1 Bitcoin into your account balance and withdrawn your funds a few weeks later, you have got two payments of 0.5 Btc rather than a payment of 1 Btc.
Is it relevant now that you have a 1 Bitcoin OR two 0.5 Bitcoin payments?
Yes. It is all right as Bitcoin and other crypto currencies are Fungible. No wonder if you’ve got 1 Bitcoin, two 0.5 Bitcoin or ten 0.1 Bitcoin Payments, it’s all worth just 1 Bitcoin for your two 0.5 Bitcoin Payments.
Non-Fungible
Any asset, commodity or good that cannot be Traded, Exchanged, break down into simpler units and not convertible into the same commodity or asset is called Fungible Asset. Fungible commodities can be traded or interchanged.
Non-fungible assets are unique, unreplaceable and non-Tradeable. Game items, Art Designs, Domain Names, Human beings, Diamonds are a few non-fungible examples.
For context, you could purchase a Domain Name in the form of payment but cannot interchange One Domain Name with another one," since the two Domain Names are unique.
What is a non-fungible token (NFT)?
A non-fungible token (NFT) is a token in cryptography since it cannot be traded with another token. NFTs are special and can’t be divided into tiny pieces.
You can, for example , give 0.5 BTC to your friend from 1 BTC you have , but this cannot be achieved with NFTs. For instance. You can’t give 0.5 NFT to your friend and can’t keep 0.5 NFT with you. Also, if you’d like to give somebody an NFT, ensure this very same NFT is returned, since each NFT is unique.
Now, this article is almost over. I hope this information is indeed meaningful to you. Kindly provide this article with constructive reviews so I can expand my literacy skills more.
You can respond this topic if you have any specific question.