What is DeFi? DeFi is a rapidly growing financial sector based on the cryptocurrency and blockchain platform. The large volume of cryptocurrencies today has created a decentralized store of value on the Internet, completely unrelated to the currencies owned by governments.
DeFi operates like a traditional bank, providing services from lending, borrowing, secured, and direct transactions. The special feature of DeFi is its decentralization and is not controlled by anyone or any institution.
In the year 2020, the world witnessed the rapid growth of DeFi. From $275 million in collateral on the system in 2019, by February 2020, DeFi collateral rose to $1 billion. In December 2020, DeFi saw a staggering record increase to $17.5 billion in multi-collateral.
These tremendous growth numbers demonstrate the market’s great interest in cryptocurrencies. So let us find out what DeFi is and why it is so attractive.
Source: DeFi Pulse
DeFi is decentralized finance, leveraging the influence of Blockchain’s decentralization and transparency to create an open finance environment. In this system, everyone can participate without being controlled by middlemen or the concentration of powers, authority, and control.
DeFi always comes with Non-Custodial.
No one invented DeFi, but the Ethereum blockchain is the base of DeFi to develop its applications. The blockchain platform was created by Vitalik Buterin. The world’s first and largest DeFi application is MakerDAO, founded by Rune Christensen.
Contents
DeFi is open source, so anyone with an Internet-connected device can easily access it.
DeFi is powered by blockchain so it is highly scalable, diverse, and interoperable.
CeFi asks people to provide personal information. However, no need to verify user identity on DeFi.
DeFi dApps restrain the participation of third parties so that the user is actually the sole custodian of the crypto asset.
Market performance data will be publicly and equally displayed to all system participants.
The DeFi regulations are automatically encrypted. Smart contracts bind users’ transactions. All are designed on the blockchain. Therefore, DeFi dApps operate automatically without any control from third-party.
Because smart contracts are publicly available on the blockchain, all users can transparently view and verify. All trading activities are also made public. However, due to privacy issues, identity on transactions will be recorded with a pseudonym by default.
Loans are DeFi’s favorite feature. Users simply deposit their crypto assets and make a profit when someone else borrows their property at high-interest rates. Similar to banks, users can monetize interest when lending money. DeFi eliminates the role of a bank intermediary. A smart contract connecting the lender and the borrower is a binding condition. Through the smart contract approved, the two parties comply with the loan terms and interest rate.
One famous platform is Compound. Compound sets interest rates by algorithm, so if the demand for crypto loans is higher, interest rates will be pushed up proportionally.
Online exchanges help users exchange between different currencies. USDT against BTC or ETH with DAI. DEX is a popular exchange type. Thanks to the decentralization feature, DEX participants own a private token, authorized to transact directly on the blockchain. The exchange does not have the authority to manage user transactions.
The DeFi has a Stablecoin platform that serves to ensure stability and avoid the fluctuation of price. Some dApps will set the exchange rate for the value of a stablecoin for a specific currency, such as dollars or euros.
The abundant cash flow on the system has led to an increase in centralized platform hacks and mining as well as DeFi. As a result, market participants need to use decentralized insurance products.
Decentralized insurance acts as a safety barrier in the DeFi. By using wallet insurance to cover smart contracts, your cryptocurrencies are protected from an error or hacker attack. DeFi Insurance offers peace of mind for crypto investors.
By incorporating blockchain technology into traditional financial operations such as payments, borrowing, or investing, DeFi is a pioneer in creating a new form of electronic financial transactions. While it’s a compelling idea, not everything benefits from decentralization. Finding the use cases that best match blockchain’s properties is crucial in building a useful stack of open financial products.
If successful, DeFi will take power from large centralized organizations and put it in the hands of the open-source community. Whether that will create a more efficient financial system will be decided when DeFi is ready for mainstream adoption.
Overall, we think DeFi is interesting and offers many opportunities for users to discover and benefit from it. You can set up your own funds and assets then make a high profit. However, you need to be persistent and learn about cryptocurrency.
Here we provide you with all information about the electronic money system, the safest way to enter the market to save you time and effort in your search and reduce your risk. Now is a good time to start learning about this exciting new industry, so you can keep an eye on how it evolves.
The first things that spring to mind when planning a trip with loved ones are…
Introduction: A New Approach to Debt Repayment Paying off debt can often feel like a…
Nowadays, prioritizing self-care has turned out to be more essential than ever. Amidst the chaos…
Test-taking is a fundamental aspect of a school student's life in Australia. From NAPLAN to…
Experiencing a lockout can be a stressful ordeal, whether it’s from your home, car, or…
A crucial aspect of harnessing real-time insights is leveraging integration between essential business tools, such…