If you are familiar with cryptocurrencies, NFTs, and blockchains, you may have even heard of DeFi, or decentralized finance, which is now thought to be the financial system of the future. The “wild west” of the cryptocurrency world, as it is often known, was discovered in 2018 by a group of businesspeople and Ethereum developers who intended to launch financial applications using the conventional infrastructure.
Blockchain technology is the foundation of the DeFi financial system, which reinvents financial transactions by doing away with middlemen. In essence, it advances traditional financial practices while also introducing novel ideas like synthetic assets. It enables users to lend to, borrow from, and exchange other users’ money as well as financial institutions like banks. It offers its users the benefit of earning interest, taking loans, and even adding NFTs as their collateral because it is built on the Ethereum blockchain. According to John Wu, president of a smart contract platform Ava Labs, De-FI-related applications run “without a central service exercising control over the entire system.”
In plainer language, De-Fi enables little players, lone projects, and teams to function by excluding the top and major participants. The goal of DeFi is to make sure that all of the products and services offered in the modern economy can self-execute using automated code.
How does DeFi work?
A blockchain stores the transaction in a number of blocks, which are then closed and encrypted once all users have concurred. Another block is made in a similar manner, and each block is connected to the others. Therefore, it is impossible to change any information in a single block without also changing every other block in the chain. Blockchain, therefore, exhibits its secure nature and can never be changed. DeFi employs the same blockchain technology as cryptocurrencies, and dApps are programs that manage transactions and manage the blockchain.
By cutting out the middleman, DeFi empowers users to participate directly in financial transactions. For instance, DeFi enables customers to transact using digital currency and maintain full ownership rather than having the bank or credit card issuer serve as the intermediary between the user and the merchant during a purchase. “It gives a unique chance for everybody with a computer and internet connection to engage in the global economy,” claims Mozgovoy, co-founder of Mover, a DeFi saving platform. To manage your finances, you don’t need a company or a government.
Where and for what purpose can DeFi be used?
- A lending network that enables individuals to borrow money from one another.
- Facilitating decentralized exchanges that allow users to convert one currency into another.
- For gambling, where customers can wager on the possible result of specific events.
- As stablecoins, any kind of cryptocurrency can be linked with a more conventional form of money like the US dollar to increase stability.
How to participate in DeFi?
The simplest method is to use an exchange to invest in and purchase cryptocurrency or any other digital currency. Follow the following steps:
- You can create a bitcoin wallet to store and transact with digital assets.
- Select the exchange you want to begin with.
- Next, keep an eye out for opportunities like cryptocurrency trading or lending that can pay you.
It takes some research on the first to get started. Once you are in, just be careful and mindful of what you are doing as it can involve risk.
What is DeFi currency?
DeFi uses cryptocurrency for its transactions. Currently, much of its concept revolves around stablecoins, which are a cryptocurrency backed by an entity or pegged to a fiat currency like a dollar.
What are the DeFi use cases?
DeFi has opened up a vast new universe of economic prospects and activities. It is more than just an up-and-coming ecosystem of initiatives; it is a substitute for the financial system. Here are a few examples of its applications:
- Asset Management – Users of DeFi have access to a platform that allows them to fully control the buying, selling, and transferring of their digital assets.
- Compliance and KYT – DeFi focuses on KYT (Know Your Transactions), which tracks transactional habits and digital addresses rather than user identities, similar to how banks utilize KYC (Know Your Consumer).
- Decentralized Autonomous Organizations (DAOs) – DAOs are by nature decentralized and don’t adhere to the restrictions imposed by centralized institutions or organizations.
- Data Analytics – Users are being helped by DeFi projects like DeFi pulses and CoDeFi data, which offer a lot of value in terms of analytics and risk management. This has helped businesses become more competitive and adaptable.
- Derivatives – Smart contracts are being used by users to create tokenized derivatives, which has recently emerged as one of the most intriguing DeFi use cases. It involves determining the value of a contract based on the underlying financial assets or group of assets.
- Infrastructure tooling – The goal of DeFi is to make it easier for system components to communicate with one another.
- Digital Identity – Blockchain-based digital identities are becoming increasingly popular in the modern world, and if they are combined with DeFi protocols, they will have simple access to the global economic system.
- Insurance – One of the most well-known DeFi use cases has proven to be in the insurance industry. Today, a number of insurance choices have surfaced, assisting clients in obtaining coverage and safeguarding their assets.
- P2P lending and borrowing – Even the established financial institutions are struggling to adapt to DeFi’s arrival. Peer-to-peer lending and borrowing have become popular and essential thanks to DeFi. On the basis of this comparable idea, several DeFi projects have already gained traction in the market.
- Prediction Market – Prediction Market: The prediction market allows users to vote and exchange values based on the outcome of events. A popular DeFi betting platform – Augur, offers prediction markets for election results, sporting events, economic events, and other topics.
What is the future of DeFi?
DeFi is still in its very early stages, thus there is a concern about infrastructure failures, hacks, and frauds. Currently, if a financial crime occurs, it is the responsibility of the jurisdiction where the crime took place. But what happens when a financial crime occurs that is transnational, protocol-based, and uses DeFi apps? All these are the questions that are still under consideration.