Decentralized Finance (Defi) refers to the transition from traditional centralized financial systems to finance through decentralized technology built on the Ethereum blockchain. From lending and lending platforms to stablecoins and tokenized BTC, the Defi ecosystem has created an extensive network of unified protocols and financial instruments. With more than $13 billion in value locked in Ethereum smart contracts, decentralized finance has become the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
Decentralized Finance (Defi) is an evolving financial technology based on a secure distributed ledger similar to that used in cryptocurrencies. This system removes the control of banks and institutions over money, financial products, and financial services.
Types of Defi Applications
Decentralized Exchange (DEX): Online exchanges allow users to exchange currencies for other currencies, such as B. Bitcoin against US Dollar and DAI against Ether. DEX is a hot exchange that connects users directly to cryptocurrency trading without entrusting funds to an intermediary.
Stablecoins: Cryptocurrencies linked to non-crypto currency assets (e.g., dollars or euros) for price stabilization.
Lending Platform: This platform replaces intermediaries like banks that use intelligent contracts to broker loans.
Wrapped Bitcoin (WBTC): A method of sending Bitcoin to the Ethereum network for direct use on Ethereum’s Defi system. It allows users to earn interest on the bitcoins they borrow through the decentralized lending platform described above.
Prediction Market: A market that bets on the outcome of future events such as elections. The Defi version of the prediction market aims to provide the same functionality without intermediaries.
Benefits of Decentralized Finance
Decentralized finance leverages the core principles of the Ethereum blockchain to increase financial security and transparency, secure liquidity and growth opportunities, and support an integrated and standardized economic system.
- Programmability : Highly programmable smart contracts automate execution and enable the creation of new financial instruments and digital assets.
- Immutability : Tamper-resistant data reconciliation through blockchain’s decentralized architecture increases security and verifiability.
- Interoperability : Ethereum’s configurable software stack allows Defi protocols and applications to be built to integrate and complement each other. As a result, Defi gives developers and product teams the flexibility to build on existing protocols, customize interfaces, and integrate third-party applications. The Defi protocol is known “don lego.”
- Transparency : On the Ethereum public blockchain, all transactions are sent and verifying by other users on the network (note: Ethereum addresses are pseudo-anonymous encrypting keys). This level of visibility into transactional data allows for comprehensive data analysis and makes network activity available to all users. In addition, Ethereum and the Defi protocol running on Ethereum are built as open-source codes that anyone can view, review, and create.
- Unauthorized : Unlike traditional finance, Defi is explains as open and unauthorized access. As a result, anyone with a crypto internet and wallet connection can access Ethereum-based Defi applications, regardless of geographic location, with no minimum funds required.
- Self-care : By interacting with unauthorized financial applications and protocols using Web3 wallets such as MetaMask, Defi market participants can always manage their assets and control their privacy.
How did Defi Start?
People initially exchanged goods and services. But with the development of people, the economy also developed. We invented money to facilitate the exchange of goods and services. As a result, the coin has helped drive innovation and create a better level of the economy. But progress has its price.
Defi claims to have started adopting Bitcoin in 2009, the first peer-to-peer digital currency built on a blockchain network. The idea of using blockchain to manage the transition to traditional finance via bitcoin has become an essential next step in the decentralization of legacy financial systems. All of this was made possible by the launch of Ethereum in 2015, specifically intelligent contracts. The Ethereum network is the first second-generation blockchain that maximizes the potential of this technology in the financial industry. Encouraged companies and corporations to build and implement projects that make up the Defi ecosystem.
How does Defi Work?
Decentralized finance uses the blockchain technology used by cryptocurrencies. A blockchain is a decentralized and secure database or ledger. Applications known Apps are being use to process transactions and run blockchains.
In a blockchain, transactions are recording in blocks and then other users verify. The league closes and encrypts if these validators agree to the transaction. In it, another block is creating with information about the previous block.
Blocks are “link” together using information from each progression block, giving it the name blockchain. There is no way to change the blockchain as the information in the previous block can`t change without affecting the next block. This concept, along with other security procedures, provides the security features of a blockchain.
If you want to start with Decentralised finance beyond the basics of cryptocurrency trading, you should proceed cautiously and work with trusting counterparties. While the returns offered by Defi are attractive, don’t blind the potential returns to other risks. A downtrend in the cryptocurrency market can quickly wipe out small profits from farming, and outright fraud or theft can soon wipe out cryptocurrency assets.