DeFi stands for decentralized finance which is an umbrella term of financial applications in digital currency or blockchain inclined towards cutting off the financial intermediaries. Decentralized finance draws inspiration from blockchain, which is the technology behind Bitcoin which is a digital currency. This allows various entities to grab a copy of the history of transactions, implying it is not controlled by a single, central body.
That is crucial as the centralized structures and the human gatekeepers can limit the sophistication and speed of transactions while providing the users less direct control over their money. DeFi is different because it extends blockchain’s use from simple transfer of value to more complex cases of financial uses.
Many digital native assets including Bitcoin stand out from the method of digital payments like those operated by Visa and PayPal, in that they discard the intermediary from the transaction process. When you pay at a coffee shop for your coffee, there is a financial institution that resides between you and the business. That institution gets complete control over your transaction. It can stop or pause your transaction whenever it wishes to and also records all your details in the private ledger. But that is not the case with cryptocurrency. It eliminated that financial institution and hence nobody can control you.
Direct purchase is not the only form of contract or transaction that is looked after by big companies. Other financial applications like insurance, loan, derivatives, crowdfunding, crypto betting, etc are also controlled by them. Discarding these middlemen from all kinds of transactions is one of the biggest advantages that DeFi carries. DeFi was often termed as “open finance” before it was commonly termed as “decentralized finance”.
Ethereum Applications In DeFi
Most of the applications that claim themselves to be DeFi are created on top of the second largest digital currency platform Ethereum. This platform is distinct from Bitcoin as apart from being just a medium of transactions, it also enables the creation of other decentralized applications based on its platform.
If you are wondering how to invest in DeFi, you can purchase DeFi tokens on eToro or Coinbase. It is a relatively fresh concept that has been made possible through the Ethereum network. The primary functions that are being served by DeFi are in the trading and lending sectors.
The DeFi Ethereum platforms provide much more flexibility as the platform is made on a smart contract which allows transactions automatically if certain conditions are met. Solidity a program of Ethereum has been made specifically to create and deploy such smart contracts.
With smart contracts at the base, dozes of applications of DeFi are functioning on Ethereum, some of which are mentioned below.
Decentralized Exchange (DEX)
A decentralized exchange which is also known as DEX is a peer-to-peer marketplace where transactions take place directly among the crypto traders. DEXs fulfill one of the core responsibilities of digital currency and that is fostering financial transactions that are not controlled by brokers, banks, payment processors, or any other type of the third party.
As the name suggests, stablecoins are digital currencies that are attached to an asset beyond digital currency like the euro or dollars for example to stabilize the value.
The lending platforms employ smart contracts to replace the middlemen like the banks that take care of the lending in the middle.
“Wrapped” Bitcoin (WBTC)
This is a way of transferring BTC to the Ether network so that it can directly be used in the DeFi system of Ethereum. WBTC enables users to earn interest on the BTC that they lend out through the decentralized platform of lending that has been mentioned above.
Prediction markets are markets used for betting on the results of future events like elections. The aim of DeFi versions of the prediction market is to provide the same operations but without any third party.
Lending Platforms Through DeFi
Decentralized finance plays a crucial role in the lending platforms, so it is worth mentioning. These platforms are one of the most famous forms of decentralized finance which act as a bridge between the borrowers and lenders of digital currencies. Compound, a popular platform enables users to borrow digital currency or offer their own digital coins for loans. The users can make money from the interest that they will receive by lending out their cryptos. Compound sets the rate of interest algorithimically, if the demand to borrow a digital currency is higher the rate of interest will be pushed higher.
The lending process in DeFi coin is based on collaterals which imply in order to take out a loan, a user is required to put up collateral often ETH. This implies that the user is revealing their identity or the credit score that is associated to take the loan.
To get rid of the constant scrutiny in all our financial transactions, DeFi which is also known as decentralized finance came into action. The main aim of DeFi is to offer a transaction atmosphere without the involvement of any intermediary keeping all data about the user anonymous. Other than this function is used in various other operations as well.
Frequently Asked Questions On DeFi
DeFi crypto meaning decentralized finance which is an umbrella term of financial applications in digital currency or blockchain inclined towards cutting off the financial intermediaries.
Ethereum, the second-largest digital currency in the world, is based on decentralized finance. This platform is distinct from Bitcoin as apart from being just a medium of transactions, it also enables the creation of other decentralized applications based on its platform.
The Ethereum platforms provide much more flexibility as the platform is made on a smart contract which allows transactions automatically if certain conditions are met. Solidity a program of Ethereum has been made specifically to create and deploy such smart contracts.