Explained: How does decentralized finance ( DeFi) work?

DeFi uses cryptocurrencies and smart contracts to provide services that don’t need intermediaries – Tamim Ehsas

✅In the last thread we discussed the Defi, its difference with traditional finance and what can we do with Defi. ✅In this thread I will explain how does the #DeFi work? 🧵👇
1️⃣DeFi uses cryptocurrencies and smart contracts to provide services that don’t need intermediaries. In today’s financial world, financial institutions act as guarantors of transactions.
2️⃣This gives these institutions immense power because your money flows through them. Plus billions of people around the world can’t even access a bank account.
3️⃣In DeFi,a smart contract replaces the financial institution in the transaction.A contract is a type of Ethereum account that can hold funds & can send/refund them based on certain conditions. No one can alter that smart contract when it’s live,it will always run as programmed
4️⃣A contract that’s designed to hand out an allowance or pocket money could be programmed to send money from Account A to Account B every Friday.
5️⃣And it will only ever do that as long as Account A has the required funds. No one can change the contract and add Account C as a recipient to steal funds.
6️⃣Contracts are also public for anyone to inspect and audit. This means bad contracts will often come under community scrutiny pretty quickly. This does mean there’s currently a need to trust the more technical members of the Ethereum community who can read code.
7️⃣The open-source based community helps keep developers in check, but this need will diminish over time as smart contracts become easier to read and other ways to prove trustworthiness of code are developed.
8️⃣Ethereum is the perfect foundation for DeFi for a number of reasons: 👇 ⭐No one owns Ethereum or the smart contracts that live on it – this gives everyone an opportunity to use DeFi. This also means no one can change the rules on you.
8️⃣.1️⃣ ⭐DeFi products all speak the same language behind the scenes: Ethereum. This means many of the products work together seamlessly. You can lend tokens on one platform and exchange the interest-bearing token in a different market on an entirely different application.
8️⃣.2️⃣ ⭐Tokens and cryptocurrency are built into Ethereum, a shared ledger – keeping track of transactions and ownership is kinda Ethereum’s thing.
8️⃣.3️⃣ ⭐Ethereum allows complete financial freedom – most products will never take custody of your funds, leaving you in control.
9️⃣You can think of DeFi in layers: 1.The blockchain – Ethereum contains the transaction history and state of accounts. 2.The assets – ETH and the other tokens (currencies).
9️⃣.1️⃣ 3.The protocols – smart contracts that provide the functionality, for example a service that allows for decentralized lending of assets. 4.The applications – the products we use to manage and access the protocols.
🔚Thanks for reading up to this point. ✔ Follow @web3_dev0 if you want to learn more about #web3, #blockchain, dApps, #NFTs and much more. ✔ Retweet the first tweet and help sharing it with others as well. ✔ DMs are always open if you have any question. 👐Have a great day

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