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DeFi
3 min

What is DeFi?

Published on
June 22, 2022
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What is DeFi?

DeFi is short for Decentralised Finance. It is a financial system that does not rely on intermediaries like brokers or banks because it is built on blockchain technology.

There is a long list of benefits you would enjoy from using DeFi platforms. These include borrowing from others, earning interests while saving, wagering on the value of assets, and trading crypto.

The October 2021 report shows that Decentralised Finance has contributed about $100 million to the financial market.

History of DeFi

As part of the development of blockchain technology, the financial world was left with no choice but to try decentralization. This led to the birth of FinTech using new protocols.

Decentralized Exchanges weigh on the smart contracts protocol to enable P2P trading. At the same time, you have total control of your assets, unlike centralized exchanges that run an open market and use order books to connect you with other traders.

Decentralized exchange enthusiasts have built a community to develop and design applications and platforms to help ease your interaction with other platforms in recent years.

Both Centralised Exchanges and Decentralised Exchanges have similar components. The aggregator layer in decentralized exchange is the difference, which is responsible for linking and relating with other platforms using smart contracts.

In 2017, DeFi was built on smart contracts, which is also the foundation of the Ethereum blockchain, and since then, other blockchains have adopted it.

According to Bloomberg, in September 2020, two out of three of the price movements in the crypto market are effects of DeFi, which, at that period, had a bond level at $9 billion. It also helped increase Ethereum developers in numbers while pulling the attention of plutocrats like Michael Novogratz and Andreessen Horowitz.

What are The Key Features of DeFi?

Before deciding whether to adopt the decentralized financial system, let's look at some things to expect.

You should know that they use decentralized applications to execute financial tasks, using blockchains after it was made known by Bitcoin. Instead of using centralized arbitrators like crypto exchanges for your transactions, you can perform them right with other traders using the smart contracts protocol.

You can access these decentralized platforms using both applications and browser extensions. For instance, you can pay or receive Ethereum with a digital wallet. Using stablecoin as an example, most of them also have features that assist you with complex financial proceedings. Whereas, as a token holder, you can borrow assets like USD and lend them out to others by laying down their collaterals.

Also, a decentralized exchange protocol called Uniswap would allow you to trade your mined tokens on Ethereum instead of filling orders with a central exchange platform. Its users entirely regulate Uniswap because it is not centralized. This means that AML or KYC regulations are not necessarily meant to be met.

Conclusion

Technologically, the world is moving towards decentralization because it would help you get your total financial dues from giant tech institutions. DeFi has brought about numerous platforms that immensely support this aim. Although some tweaks are needed for some of its protocols, like being liable to hacks and irreversible errors, it is a way forward.