Updated: Feb 17
Decentralized finance or DeFi is a paradigm shift for P2P or peer-to-peer finance from the centralized/ traditional financial systems to a decentralized/ digital version managed entirely by smart contract on Ethereum, NEO, EOS, TRON, COSMOS, etc, without human interference.
The DeFi ecosystem develops alternatives to many traditional financial services available presently including insurance, asset trading, loans, and much more. Decentralized finance expands the reach and functionality of money, therefore playing a significant role in the fast evolution of our financial sector.
In short, DeFi can be said as the crypto assets that can be put into several uses in various ways that were not possible with “real-world” or fiat assets. Synthetic assets, decentralized exchanges and flash loans against collaterals are novel applications that exist on the blockchain. This ultra shift in financial infrastructure leads to open paths to numerous advantages from the aspect of trust, risk, and opportunity.
Decentralized Applications — Dapps
Decentralized finance depends on Dapps for providing its services. The decentralized nature of smart contracts form the major backbone of the services. The absence of an agency, central authority, or corporation, which usually approves and monitors business functions of applications, makes Dapps independent of human intervention. Advanced smart contracts are integrated by these platforms for streamlining their business structures.
Smart contracts can be referred to as pre-programmed functions that can handle multiple tasks from receiving Crypto deposits from customer to sending them Crypto upon triggering of fixed events in smart contracts. While Ethereum has been the numero uno in the explosion of DeFi services but several others like EOS, NEO, COSMOS has been focusing to challenge ethereum’s status and addressing issues like exorbitant gas fees &network congestion.
Advantages of Decentralized Finance:
The prime principles of the Ethereum blockchain and its likes (EOS, TRON, COSMOS, etc) are leveraged by decentralized finance that helps in increasing financial transparency and security, supporting a standardized and integrated economic system, and unlocking growth opportunities and liquidity.
Data cannot be tempered in this process, which makes coordination across the blockchain decentralized system highly safe and secure.
It is entirely programmable, accompanied by automatic execution facility and creation of digital assets and financial instruments.
Decomposable software stack of Ethereum ensures that applications and protocols of centralized finance are designed to complement and integrate each other. With this evolving financial facility, product teams and developers get the flexibility to add on the existing customized interfaces, protocols, and integrate third-party apps. Hence, DeFi protocols are often termed as “Money Legos.”
DeFi comes with permissionless, open access, and anyone having a stable internet connection and a crypto wallet can access decentralized finance applications developed on Ethereum, regardless of the geographical boundaries and minimum fund deposition.
Web3 wallets are used to interact with permissionless protocols and financial apps. The market participants of decentralized finance can keep control of personal data and custody of assets.
All the transactions on the Ethereum blockchain are broadcasted for verification by other users available on the network. The high level of transparency ensures rich data analysis, along with the availability of network activity for all uses.
Use Cases for DeFi
A world of opportunities and economic activities centered around cryptocurrencies have been unlocked with the decentralized finance protocols for people around the globe. DeFi is certainly more than a mere emerging ecosystem. It can be stated as an integrated and wholesale effort to create a parallel financial structure on Decentralized Ledger Technologies (DLT), that competes with the centralized services owing to its inherent transparency, accessibility, and resilient features.
Compared with the traditional centralized financial market, DeFi is a composite ecosystem that can use interactive smart contracts to adjust the highest interest rate. DeFi Platform users can also exchange tokens and reduce transaction costs through simple operations. The funds that users deposited in DeFi projects are automatically controlled by smart contract and can automatically lend against deposits, like in AAVE, dydx, etc.
In traditional financial systems, users need to have a bank account to use the service. And borrowing money from banks is subject to some restrictions, such as a high credit score, creditworthiness and sufficient collateral to convince the bank that it is capable of repaying the loan. DeFi lending service removes this barrier, allowing anyone to mortgage crypto assets and use them for staking. In addition, by contributing the liquidity of the lending pool to enter the lending market, you can also earn interest from these borrowed assets. Due to the decentralization of lending, there is no need to check your bank account or creditworthiness. You can also lend out your borrowed assets for asset utilization.
In the case of traditional finance systems, margin traders can leverage their transactions by borrowing funds from brokers and providing them in the form of collateral for loans. However, for decentralized finance margin trading is featured by non-custodial decentralized lending protocols like dYdX and Compound.
The protocols of decentralized finance support a range of online marketplaces where users get the opportunity to exchange services and products worldwide and P2P — everything from digital collectables to freelance coding gigs to apparel and jewellery.
Borrowing and lending
P2P borrowing and lending protocols are the most vividly used apps in the decentralized finance ecosystem. For instance, Compound is an autonomous and algorithmic interest rate protocol, which underlies the massive list of decentralized finance platforms.
Decentralized finance can be said as an emergency space that is surrounded by attendant risks around contract breaches and bugs. Numerous insurance alternatives have emerged into the market to assist users in protecting the holdings and purchase coverage.
Trading in the decentralised finance ecosystem encompasses a vast list of activities, starting from margin trading to derivatives to token swaps. It takes place over the integrated and ever-growing exchange networks, marketplaces, and liquidity pools. Moreover, crypto traders in these financial exchanges can get immense benefits from faster transaction exchange fees, quick transaction settlement, and complete asset custody.
Tokenization — The cornerstone for explosion of DeFi
It can be said as one of the prime cornerstones of the decentralized finance structure, accompanied by a native functionality of the blockchain. Tokens help in pulling the entire network as well as unlocking numerous economic possibilities. NFTs are an exciting trend in this sphere.
In simple terms, tokens can be defined as a digital asset, which is developed, managed, and issued on a blockchain. They are created to be instantly transferable and secure. Moreover, they can also be programmed with multiple built-in functionalities. But like ICO hype, DeFi projects have also attracted Scams in the Crypto Space mainly fueled by the greed of investors looking for quick 100X — 500X returns; giving DeFi a bad name.
platform solves these problems of “transparency”, “fairness” and “asset deposit risk” through audited smart contracts. DeFi represents a trend that allows everyone to equally use financial products without borders and without censorship. The DeFi agreement means everyone is treated equally and in a fair position. Basically you can check the interest rate of each currency in real time on the platform and the platform will provide the best strategy for the assets owned by the user (Transparency). The interest rate is counted per block (every 15 seconds) instead of once a month, and you can immediately deposit money into your wallet (such as Metamask, etc.) without spending several days withdrawing money.
Moreover, our decentralized financing system, which follows the principles of the Ethereum blockchain would provide a range of benefits to our clients, which will be discussed in great details, in upcoming posts.
The Cryptocurrency ecosystem has undergone transformation towards the concept of decentralization, creating immense demand for DeFi applications in the present times. These next-generation applications will keep on disrupting the present business structure in remarkable ways.
Within a short span of time, DApps would develop into an alternative investment platforms for the Millennials. Consequently, the world economy will tend to follow the trends in Blockchain & Crypto in the upcoming years, starting with Banking & Finance. As of now, Ripple, R3 Corda & ConsenSys have already started working with established Banks & Fintech players to usher in the change and the explosion in DeFi space would further accelerate these trends.