Finance in the world of crypto, often referred to as "decentralized finance" or DeFi, works fundamentally differently from traditional finance. Instead of relying on central authorities like banks and governments, it uses a decentralized, peer-to-peer system built on blockchain technology.
Here's a breakdown of how it works and its key concepts:
The Core Principles of Crypto Finance
Decentralization: This is the most important principle. In traditional finance, a bank acts as a trusted intermediary, controlling your money and verifying transactions. In crypto finance, this role is replaced by a decentralized network of computers. No single entity has control.
Blockchain: All crypto transactions are recorded on a public, distributed ledger called a blockchain. This is an immutable and transparent record of every transaction, ensuring trust without a central authority. Every participant on the network has a copy, and transactions are verified through a "consensus mechanism," like Proof-of-Work (used by Bitcoin) or Proof-of-Stake (used by Ethereum).
Cryptocurrency: This is the digital currency itself, such as Bitcoin (BTC), Ethereum (ETH), or others. They are created and secured using cryptographic techniques, making them nearly impossible to counterfeit.
Smart Contracts: These are self-executing contracts with the terms of the agreement directly written into code. They run automatically on the blockchain when certain conditions are met, enabling a wide range of financial services without the need for an intermediary. Ethereum was the first major platform to popularize this concept.
