Understanding How De-Fi Systems Work
By Space Coast Daily // December 27, 2021
De-Fi (decentralized finance) is the use of blockchain technology to create financial products and services that operate without a centralized authority. This includes decentralized exchanges, peer-to-peer lending, and asset management. This article will explain how decentralized finance works, and why it matters.
Decentralized finance (De-Fi) refers to the use of blockchain technology to create alternative financial products that are more resistant to censorship, surveillance, and regulation by centralized authorities.
It is about building new systems for storing, managing, and exchanging value in a way that is more resilient to the types of censorship and shutdowns from powerful third parties that we have seen with Facebook, Google, Apple, Amazon, MasterCard, Visa & PayPal.
De-Fi and Cryptocurrency
We’ll start by talking about cryptocurrency. Cryptocurrency is money that only you can spend because it’s encrypted with a private key. A public key (what you give to people so they can send you the money) encrypts it, and your private key decrypts it. Only you have this private key, so if anyone gets access to it they can steal your money.
That’s why cryptocurrency is often called digital cash – just like physical cash, there is no third party that has to verify whether you have the right to spend your money (your bank doesn’t get a vote).
When trading on Quantum AI, your cryptocurrency will be safe and the decentralization system gives you a lot of liberty. The Decentralized Exchange will never go down and your money is safe.
Cryptocurrencies are digital assets that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
How De-Fi Works
In a De-Fi system, there is no centralized authority that manages your money. Instead, the money is managed by a network of computers that all agree on the state of the ledger. This network is known as a blockchain.
When you want to send money in a De-Fi system, the money doesn’t go through a third party. Instead, it is transferred directly from your account to the account of the person you are sending it to. This system is known as a peer-to-peer network.
This is different from a centralized system like PayPal, where the money goes through PayPal first. In a centralized system, PayPal (or whichever company is in charge) decides who has the right to spend the money, and under what conditions. In a peer-to-peer system, there is no one in charge – instead, when you send the money it goes from your account directly to the account of the person you sent it to.
In order for this to work, everyone who uses the system needs to agree on the state of the ledger. This is done by using a consensus algorithm like Proof of Work or Proof of Stake.
Why De-Fi Matters
The biggest benefit of De-Fi systems is that they are censorship-resistant. In a centralized system, if the company in charge decides to shut down your account, they can. This is what happened to the cryptocurrency exchange Mt. Gox, which was shut down by the US government in 2013.
In a De-Fi system, there is no one in charge – so if the company in charge decides to shut down your account, there’s nothing they can do about it. This makes De-Fi systems much more resistant to censorship.
De-Fi systems also tend to be more secure than centralized systems. This is because they are based on blockchain technology, which is much more secure than traditional databases.
Finally, De-Fi systems are often much cheaper to use than centralized systems. This is because there is no middleman taking a cut of the profits.