What is the mechanism of DeFi?

DeFi provides services without the need of middlemen by utilizing cryptocurrency and smart contracts. Financial institutions serve as transaction guarantors in today’s financial environment. Because your money flows through them, this gives these institutions tremendous influence. Furthermore, billions of individuals worldwide lack access to a bank account.

In DeFi, the financial institution is replaced by a smart contract. A smart contract is an Ethereum account that can store money and send/refund it based on specific criteria. When a smart contract is live, no one can change it; it will always operate according to the instructions.

A contract for the distribution of a stipend or pocket money might be set up to transfer money from Account A to Account B every Friday. And it’ll only do so as long as Account A has the cash it needs. To steal funds, no one can modify the contract and add Account C as a receiver.

Contracts are also open to inspection and audit by anybody. As a result, poor agreements will frequently be scrutinized by society.
This implies that there is presently a need to have faith in the Ethereum community’s more technical members who can understand code.

The open-source community helps keep developers in check, but as smart contracts grow simpler to comprehend and new means to establish code’s trustworthiness are created, this will become less of an issue.

DeFi and Ethereum
For a variety of reasons, Ethereum is the ideal basis for DeFi:

  • No one controls Ethereum or the smart contracts that run on it, which means that anybody may use DeFi. This also means that no one can force you to follow the rules.
  • Behind the scenes, all DeFi products use the same language: Ethereum. As a result, several of the items function in tandem.
  • You may lend tokens on one platform and then swap the interest-bearing token in a separate market on a different app. It’s similar to being able to cash in your reward points at your bank.
  • Tokens and cryptocurrencies are integrated into Ethereum, a shared ledger — it’s Ethereum’s job to keep track of transactions and ownership.
  • Most goods will never take custody of your cash, keeping you in control. Ethereum provides total financial independence.
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