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What is decentralized finance (DeFi)?

Today, cryptocurrencies have grown into a trillion-dollar sector, causing a wave of global financial disruption.


At the core of cryptocurrencies is a fascinating history of invention dating back to the 1980s, when advances in cryptography were made. Since then, a succession of events have changed the crypto space, with the most notable being the first cryptocurrency, Bitcoin. Despite its meteoric rise over the last 12 years, financial services for Bitcoin have been sluggish to emerge, owing mostly to the currency's intrinsic lack of stability and acceptance. Because of its high price volatility, mainstream banks will not accept a Bitcoin loan – making Bitcoin a terrible asset for correctly planning any investment.


Things move rapidly in the crypto world, and decentralized finance (DeFi) is a contemporary trend - it's an exciting place to be, without a question. If you're still not familiar with DeFi, let's delve a little further and discover more about it.


Decentralized finance (DeFi) explained

Decentralized finance (DeFi) is an umbrella word for a range of public blockchain applications and projects aimed at disrupting the existing finance world. DeFi is defined as financial applications built on blockchain technologies, often employing smart contracts, and is inspired by blockchain technology. Smart contracts are automated enforceable agreements that can be accessed by anybody with an internet connection and do not require middlemen to execute.


DeFi applications and peer-to-peer protocols developed on decentralized blockchain networks that do not require access privileges for basic lending, borrowing, or swapping of financial instruments are referred to as DeFi. The Ethereum network is used to build the majority of DeFi apps today, but many other public networks are developing that provide greater performance, scalability, security, and reduced prices.


What are the benefits of smart contracts?

Most smart contracts include Turing Complete programming languages, which allow many parties to interact with one another without the need for a centralized middleman. Because of blockchain's capacity to capitalize on smart contracts, it has become an excellent platform for developing financial applications.


How did DeFi get its start?

Initially, humans bartered for goods and services. However, as people progressed, so did economies: we established a currency to facilitate the trade of goods and services. As a result, coins aided in the introduction of new inventions and the development of higher economic levels. Progress, however, comes at a cost.


Historically, central governments have produced currencies that underlie our economy, giving them increasing authority as more people came to trust them. However, confidence has been violated on occasion, leading individuals to question the centralized authorities' capacity to handle the money. DeFi was founded with the intention of creating a financial system that is open to everybody and removes the need to trust and rely on a centralized authority.


Some claim that DeFi originated in 2009 with the introduction of Bitcoin, the first peer-to-peer digital currency built on top of the blockchain network. The notion of introducing a revolution into the traditional financial sector through blockchains became a crucial next step in the decentralization of legacy financial institutions thanks to Bitcoin. All of this was made possible by the 2015 debut of Ethereum and, more particularly, smart contracts. The Ethereum network is a second-generation blockchain that was the first to fully realize the promise of this technology in the financial industry. It encouraged firms and enterprises to create and deploy DeFi-related projects, forming the DeFi ecosystem.


DeFi provided a variety of options to create a transparent and strong financial system that is not controlled by a single organization. However, the turning point for financial applications began in 2017, with initiatives enabling more functionality than only money transmission.


Difficulties with centralized financing

Financial markets may allow brilliant innovations and create societal prosperity. Nonetheless, authority is concentrated in these marketplaces. When consumers participate in the existing financial system, they give over their assets to intermediaries like banks and financial institutions, which maintains risk and control at the core of these systems.


Historically, bankers and institutions have failed to recognize market dangers, as seen by the 2008 financial crisis. Without a doubt, when central authorities manage money, risk builds in the center, endangering the whole system.


Bitcoin and other early cryptocurrencies, which were designed to offer individuals total ownership over their assets, were merely decentralized in terms of issuance and storage. Until the introduction of smart contracts, which permitted DeFi, access to a larger range of financial instruments remained impossible.


DeFi protocols and how they function

DeFi has evolved into a fully functional ecosystem of operating apps and protocols that provide value to millions of consumers. DeFi ecosystems already hold assets worth more than $30 billion, making it one of the fastest-growing segments in the public blockchain world.


Here's a rundown of the most common DeFi use cases and protocols on the market right now:


DeFi lending and borrowing

By facilitating lending and borrowing, DeFi shifted finance in a new direction. Decentralized lending, often known as "Open Finance," provides crypto holders with lending possibilities to earn yearly returns. Individuals may borrow money at a fixed interest rate thanks to decentralized borrowing. The goal of lending and borrowing is to meet the requirements of the bitcoin community while also serving financial sector use cases.


DeFi in the Future

We are witnessing a quantum jump in the new functions of money as a result of distributed ledger technology innovation. For the first time in history, a global financial system for a global population is being shaped by that people itself.


Everyone is welcome to participate in the governance of DeFi protocols and have a seat at the table where the world of decentralized finance is actively being built.

The DeFi space is progressively catching up with the traditional financial system, and despite some of the challenges that come with operating on the cutting edge of innovation, the world of decentralized finance is on the rise. It's tough to anticipate how this area will evolve over time as the ability to develop financial services becomes more democratized. However, at the moment when DeFi and fintech intersect and combine, we will reach an inflection point in which embryonic financial technology will become a component of a new financial system. One that achieves the goal of being quick, safe, accessible, and egalitarian.