DeFi: the future of finances is already here
The financial sector has long been viewed as highly regulated and far from inclusive. Traditional banking services are slow to upgrade and not so easy to get access to due to its centralized nature. The crypto industry has created an alternative to the financial system we know and made it accessible, open, and highly efficient. That’s DeFi or decentralized finances we’re talking about. Let’s figure out what stands behind the buzzword and how the newly created ecosystem helps to solve the issues faced by conventional financial institutions.
What is DeFi?
DeFi is a term for decentralized financial applications running in blockchain networks, most of them having Ethereum protocols. With traditional finances, there’s always a middleman negotiating the terms of providing services, while dApps are based on smart contracts that manage everything. A smart contract is a piece of code that initiates the operation when predetermined conditions are met. This allows automating business processes and excluding the third party, helping users regain full control over their funds. The use of decentralized apps is easy and widely available since all that is needed is a smartphone with a digital wallet. This greatly expands the reach of finances, as now the unbanked population and anyone else who couldn’t access monetary services are finally in the game. The DeFi system is opensource that makes it transparent and change-friendly. Developers can build apps on top of existing ones, add new features, and combine various products, which widens the scope of functions users can make use of. At the moment, dApps can provide a huge variety of services inherent in the financial sector, the settlement of which is fast and “permissionless”. Take a look at some of the DeFi use cases:
Stablecoins
These are cryptos whose price is pegged to valuable real-world assets but which are not monitored by any central body. Such a combo makes them resistant to volatility yet decentralized. Stablecoins can be used as digital cash, serve as collateral, or as utility tokens. One of the most popular stablecoins is DAI by MakerDAO that is backed by Ether. The user sends some amount of ETH or any other ERC-20 tokens to a smart contract that issues a token. Another example of a stablecoin is MKR utilized to cover fees for using smart contracts or to vote for any decision regarding the platform.
Lending and borrowing
Open protocols ensure instant transaction execution, reduce counterparty risks, and enable digital assets collateralization. The whole process turns out to be quick, cheap, and more accessible. Lenders don’t have to worry about the funds they credit, as most loans are backed by the amount exceeding the value of the loan.
Managing assets
People can tokenize financial assets by deploying them to the blockchain, and DeFi protocols will enlarge their utility. For example, smart contracts can make investment decisions on behalf of a user. Alternatively, there’s a Set protocol that replenishes the balance or follows technical indicators.
DEXes
Decentralized exchanges, or DEXes, allow users to trade their assets without trusting them with a centralized entity. Thanks to smart contracts, they can interact directly with the digital wallets of other traders. This largely reduces maintenance costs and results in lower transaction fees.
Summary
DeFi has created a truly inclusive environment that is highly technological, available, and public all at the same time. Now, as developers can freely implement their ideas and people worldwide access a whole new spectrum of services, the financial ecosystem is getting the scope and developmental level it has never seen before. Next week, we’re going to list 11 DeFi tokens promising a bunch of use cases. Get ready to embark on a journey across the world of decentralized finances with limitless possibilities.