Published Jul, 11 2023

Demystifying Decentralized Finance

For those new to DeFi, it can be a confusing concept to understand. But don’t worry! We’re here to unveil the financial landscape that is decentralized finance and set you up for success. DeFi uses blockchain technology to support financial services with the need for a bank, an exchange, or the government.  It provides a […]
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For those new to DeFi, it can be a confusing concept to understand. But don’t worry! We’re here to unveil the financial landscape that is decentralized finance and set you up for success. DeFi uses blockchain technology to support financial services with the need for a bank, an exchange, or the government. 

It provides a balance of power by taking away some of the sway that large financial institutions hold. Whether you want to start dabbling in cryptocurrency or simply learn more about it, read on for the answers to your most probing questions.

How DeFi Works

The whole idea behind DeFi is to offer many of the same products and services that traditional financial institutions offer, but through a new infrastructure that gives power back to the people. This is accomplished through smart contracts and blockchain technology.

Blockchain is a type of ledger that records transactions made on the DeFi platform. Much like a traditional financial ledger would record withdrawals, deposits, purchases, and other transactions.

Smart contracts are algorithms that activate when a set of predetermined rules between two parties are met. This removes the intermediary, so you don’t need a bank or a lawyer to close on a loan, settle remittances, or conduct any of the other more complex transactions you might perform through traditional finance.

These peer-to-peer transactions replace these third parties and allow individuals to interact directly with one another without worrying about accountability or transparency. Using DeFi, cryptocurrencies can provide similar services to the U.S. dollar and other fiat currencies.

Facing Off With Traditional Finance (TradFi)

The argument for DeFi is that it replaces the third-party institutions you need today to manage your finances. Many proponents of DeFi believe it will disrupt and replace traditional banking because decentralized blockchains remove the need for an intermediary.

The primary reason we use banks today is to enable transactions. We trust them to hold our money for us until we need it. Whether that’s swiping a card at the store, transferring among bank accounts, or sending money overseas, they provide the platform we need to do those things.

While transferring money domestically is pretty straightforward, sending money internationally is a complicated process fraught with fees. The same goes for managing your assets, including ownership in a company. We rely on fund managers (so-called “experts”) to tell us they’re making the best use of our money. Shouldn’t we know firsthand exactly what our money is doing?

By using DeFi, we can remove these hidden costs, additional fees, and other obstacles to accessing our finances. We don’t have to rely on anyone else, and we can be in complete control.

Benefits of DeFi

As if what you’ve been reading isn’t enough, here are some more benefits to using DeFi, over and above the products and services you’ve come to expect from TradFi:

Risks

Okay, so, unfortunately, there are always risks. Not even DeFi is perfect. Here are some of the things you should consider if you plan to use DeFi:

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