Imagine you are starting a business, you need a loan to raise capital. You will approach a bank or a financial service company that will lend you money at a particular interest rate. This money does not belong to the bank actually, it belongs to some depositor or investor somewhere in the world who gave it to the bank as they promised an interest rate. The interest paid by the bank to a depositor will be always less than that you will pay the bank on your loan. This difference is how the bank makes money.

Now you got the loan and you started your business, now you have to pay for goods or raw materials. Again you pay the agreed amount to the seller's bank account. You have to pay salaries to your workers which are also paid through the bank. All of these transactions are going through a middleman that is the bank.

As I have mentioned in my previous post, cryptocurrency is now shifting its modes to be similar to the conventional currency. If you are not familiar with that idea read my article on the stable coin by clicking the link below.

Everything you should know about stable coins

Imagine a system in which everything is done using crypto? What if you can lend someone somewhere in the world a portion of Ethreum that you hold and earn interest?

It sounds fascinating, right?

The. Decentralized Finance ( DeFi) or the open finance system takes cryptocurrency to the next level. The very on goal is to develop a cryptocurrency based system for all the financial services. Yes, that's correct, you will be able to avail loans, pay insurance, trade, and do anything that is possible with a conventional currency.

Wondering how this is possible? I will suggest you to continue reading.

This is achieved by using something called "smart contracts". Smart contracts are programs that basically use blockchain technology. These smart contracts execute automatically when certain conditions are met.

The technology that cryptocurrency runs on not only allows the sending and receiving of crypto, more sophisticated functions can be added to this system using smart contracts.

Let us call these programs as decentralized apps.

These apps are made on decentralized technology, that is why they are not controlled by any single entity. You may find the idea too futurist, but there are some programs which are currently running.

HOW IS THIS DIFFERENT FROM BANKS?

Mainly these DeFi apps are not managed by a single entity or a company or its employees. Everything is kept in order using codes, remember the smart contract I mentioned? This system can run independently without human intervention.

It's transparent - don't worry all transactions are public so is the code. Anyone can examine them and find bugs. If you are concerned about your identity? You are safe there, your identity will be anonymous.

This one is global, whether you are in India or US, you can access them if you have a suitable connection and a device.

Stay away from the magnifying glass. These are literally paperless, there are no gatekeepers or middlemen. You are interacting directly with the smart contracts. This position of DeFi which prevents government intervention is probably why India is planning to ban cryptocurrency. If you didn't know about this feel free to check them by clicking the links below.

Will cryptocurrency be banned?

Click here to read

Will india regulate cryptocurrency trade?

Click here to know

Defi is one of the rapidly growing financial branches, I will be sharing more updates soon.