The current banking system has some major issues such as inaccessibility and regulatory uncertainties. Unfortunately, not everyone is privileged to be banked in the current financial system. The DeFi movement is about bridging these gaps, and making finance accessible to everyone without any form of censorship. It’s an umbrella term for the part of the crypto universe that is geared toward building a new, internet-native financial system, using blockchains (primarily Ethereum) to replace traditional intermediaries and trust mechanisms. In short, the movement opens up huge windows of opportunities and allows users to access various financial instruments without any restriction on race, religion, age, nationality or geography. Decentralized finance is an innovative technology in finance based on safe ledgers which are distributed like those applied by cryptocurrencies. These financial services are provided via Decentralized Applications (Dapps), in which a majority of them are deployed on the Ethereum platform. The term ‘DeFi’ was first presented in 2018 related to the financial use cases that were beginning to emerge on Ethereum.
- The fees that banks and other firms working in the field of finance get for offering their services will be eliminated.
- Borrowing, lending and earning interest by using of smart contracts which determine the loan terms, connect lenders to borrowers, and oversee the distribution of interest.
- Decentralized exchanges which offer trading digital assets directly without the need for a centralized exchange.
- Creating monetary banking services without the volatility such as stablecoin mortgages and insurances.
- Funds and assets can be transferred in seconds and minutes.
Why is DeFi important?
DeFi is considered as the base of Bitcoin which is the first digital money and expands on it, creating an entire digital alternative to stock market, but without all the related costs (think office towers, trading floors, banker salaries). There is potential to make more open, free, and fair financial markets that are able to be accessed to everyone with an internet connection. So Decentralized Finance is crypto’s version of a stock exchange? That can be said so. However, it’s not a complete definition of the technology. It’s true that DeFi also includes things like lending platforms, prediction markets, options and derivatives. Basically, crypto people are creating their own version of Wall Street, which is largely decentralized and conducts trades exclusively in crypto, with crypto versions of many of the products offered by traditional financial firms, and without much of the regulations that manipulate the current financial system.
Ethereum, the world’s second-largest cryptocurrency platform, is a blockchain on which most decentralized finance applications are built. Ethereum sets itself apart from the Bitcoin platform in that it’s easier to use to create other types of decentralized applications beyond simple transactions. It’s because of Ethereum’s platform for smart contracts – which automatically conduct transactions if certain requirements are met – provides much more flexibility. Ethereum programming languages, such as Solidity, are specifically designed for creating and deploying such smart contracts. With smart contracts at the core, dozens of DeFi applications are operating on Ethereum, some of which are explored below. Ethereum 2.0, a coming upgrade to Ethereum’s underlying network, could give these apps a boost by chipping away at Ethereum’s scalability issues.
What are the most popular types of DeFi applications?
- Decentralized exchanges (DEXs): Online exchanges assist users exchange currencies for other currencies, either U.S. dollars for bitcoin or ether for DAI. DEXs are a hot type of exchange, which connects users directly so they can trade cryptocurrencies with one another without trusting an intermediary with their money.
- Lending platforms: Smart contracts are applied to replace intermediaries such as banks that manage lending in the middle.
- “Wrapped” bitcoins (WBTC): This is an approach to send bitcoin to the Ethereum network so the bitcoin can be applied directly in Ethereum’s DeFi system. WBTCs enable users to get interest on the bitcoin they lend out through the decentralized lending platforms described above.
Is investing in DeFi safe?
Absolutely not. It can be terribly risky, since it’s difficult to separate the good projects from the bad ones. In a nutshell, since DeFi is mostly unregulated, with few of the consumer protections and safeguards that exist in the traditional financial system, people are so worried about it. One example which worries users is stablecoins. Well, regulators have argued that despite the name, they aren’t actually that stable. Investors might believe that USDT or tether might be exactly as one USD. Nevertheless, here’s nothing in the law, at present, that requires stablecoin issuers to have one-to-one Support. In addition, if they don’t have enough reserves to cover them which are being issued, the whole thing could collapse if enough investors decide to withdraw their money all at once. That is why, many might be worried about DeFi, even though it is considered as the future of finance.
How Does DeFi Work?
Decentralized finance applies the blockchain technology that cryptocurrencies use. A blockchain is a distributed and secured database or ledger. Applications called dApps are used to handle transactions and run the blockchain. In the blockchain, transactions are recorded in blocks and then approved by other users. If these verifiers agree on a transaction, the block is closed and encrypted; another block is created that has information about the previous block within it.
Important benefits of DeFi
Decentralized Finance has some pros such as potentially greater security, potentially lower costs, greater types of services and the ability to earn higher income through their crypto holdings. These advantages and others are enabled through decentralized apps created by various groups. Decentralized Apps (dApps), enable users to conduct transactions throughout the world with lower cost and faster settlement, peer to peer lending and borrowing, crypto exchange services, NFTs, and crypto wallet and storage solutions.
How to start
Walliro is a best-in-class decentralized, scalable, flexible, multi-signature and DeFi integrated platform to manage digital assets. It helps you to exchange, earn interest and invest through Dapps. It doesn’t require any subscriptions, sign-ups, or logins. It’s only necessary to select a blockchain network, connect the wallet and create or manage Walliros.