What Is A Decentralized Financial System?

If you’ve ever been charged by a bank simply for receiving or sending money, then this is a topic you will find interesting.

3 min readMar 12, 2022

Short for decentralized finance, DeFi is an umbrella term for a variety of applications and projects in the public blockchain space geared toward disrupting the traditional finance world.

Inspired by blockchain technology, DeFi is referred to as financial applications built on blockchain technologies, typically using smart contracts.

Photo by Shubham Dhage on Unsplash

Smart contracts are automated enforceable agreements that do not need intermediaries to execute and can be accessed by anyone with an internet connection. Basically a financial system without your bank or other financial companies.

Why is it becoming a rev in the financial, cryptocurrency, and gaming industry?

  • It eliminates the fees that banks and other financial companies charge for using their services.
  • You hold your money in a secure digital wallet instead of keeping it in a bank. Plus your money doesn’t start losing weight because someone wants to maintain their already built ATMs in a city you don’t live in.
  • Anyone with an internet connection can use it without needing approval. You can transfer funds in seconds and minutes.
Photo by Sharon McCutcheon on Unsplash

To understand decentralized finance (DeFi) and how it works, it might help to understand how centralized finance differs from DeFi.

What is Centralized Finance?

In centralized finance, your money is held by banks, corporations who have an ever-increasing desire to make more money from your money. The financial system is full of third parties who facilitate money movement between parties, with each one charging fees for using their services. I think at this point you get the drift.

What is Decentralized Finance?

Decentralized finance eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology. This is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, and hardware advancements.

From anywhere you have an internet connection, you can lend, trade, and borrow using software that records and verifies financial actions in distributed financial databases.

Why is DeFi important to us in the future?

DeFi takes the basic premise of Bitcoin — digital money — and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.

Benefits of DEFI?

  • Open: You don’t need to apply for anything or “open” an account. You just get access by creating a wallet.
  • Pseudonymous: You don’t need to provide your name, email address, or any personal information.
  • Flexible: You can move your assets anywhere at any time, without asking for permission, waiting for long transfers to finish, and paying expensive fees. Your money, your rules!
  • Fast: Interest Rates and rewards often update rapidly (as quickly as every 15 seconds), and can be significantly higher than traditional Wall Street.
  • Transparent: Everyone involved can see the full set of transactions (private corporations rarely grant that kind of transparency). You know how your money moves and the history can’t be altered by anyone.

A Lot of people have mixed opinions about DEFI and if it should be adopted widely or not, but we would love to hear your thoughts. Drop a comment under this story and share your thoughts on DEFI with us.

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