Defi is just short for decentralized finance – a sort of umbrella term for various financial applications in the blockchain or crypto space headed towards interrupting financial intermediaries.
In fact, DeFi draws primary inspiration from the world of blockchain, the basic tech behind Bitcoin, a digital currency that allows multiple entities to obtain a copy of the transaction history. This means it is not controlled by any central and single source.
That is vital because human gatekeepers and centralized systems can restrict the sophistication and speed of transactions while providing users with relatively less control over their finances.
Defi is distinctive since it actually expands blockchain usage from a simple mode of transferring value to relatively more complex cases of financial usage.
Bitcoin and several other digital assets typically stand out from famous digital modes of payment like the ones run by PayPal and Visa in that they get rid of all middlemen from different transactions.
For instance, when you pay for coffee with your credit card, the financial institution between the two parties has control over this transaction.
Moreover, it retains the authority to pause or stop it as well as record the details of the transaction in the private ledge of the organization. With crypto, those financial institutions are simply cut out of the whole picture.
In fact, direct purchases are not the only kind of contract or transaction under big companies. Additionally, financial applications like betting, derivatives, crowdfunding, insurance, loans, and so much more are under their control as well.
The primary advantage of Defi is to cut out all middlemen from all types of transactions. Before, it was typically called decentralized finance; the concept was known as ‘open finance.’
Defi And Ethereum Applications:
Most Defi apps are developed on top of the second-largest crypto platform in the world, Ethereum.
Interestingly, Ethereum is a platform that has managed to set itself apart from Bitcoin since it is easier to do different types of defi applications beyond the common transactions on Ethereum. These are relatively more complicated financial cases. Moreover, in 2013, Vitalik Buterin, Ethereum creator, highlighted these cases in the platform’s original white paper.
Ethereum’s platform comes with a smart contract feature that executes transactions automatically if specific conditions are met.
Additionally, the smart contract feature only adds to the flexibility. Moreover, the programming languages of Ethereum, like Solidity, are designed specifically for not just creating but also deploying smart contracts.
With the concept of smart contracts at its center, several defi apps are now running on Ethereum, some of which we have explained below.
1. Decentralized Exchanges Or DEXs:
Online exchanges are here to help us exchange currencies, whether USD for BTC or DAI for Ether. Similarly, DEXs or decentralized exchanges are a hot kind of exchange that directly connects users for trading their cryptos with each other without the help of any third party.
2. Stablecoins:
If a crypto is related to an asset outside the crypto space for stabilizing its price, then it’s called a stablecoin. Here, the asset can refer to anything that is not crypto, like the euro or the dollar, for instance.
3. Lending Platforms:
Lending platforms are platforms that utilize contracts for replacing intermediaries like banks that are responsible for managing lending in the middle.
4. Wrapped Bitcoins Or WBTC:
One way to send BTC to the Ethereum network so that it can be directly used in the defi system of Ethereum is via wrapped Bitcoins. In fact, wrapped bitcoins or WBTC enable users to actually earn interest on the BTCs they lend through the lending platforms in the decentralized space.
5. Prediction Markets:
Prediction markets are betting markets that allow users to bet on the outcome of events in the future, like elections. The purpose of defi prediction markets is to provide a similar functionality. But here, there is no intermediary.
The Emergence Of New Defi Concepts:
Apart from the defi apps we mentioned a while ago, here are the brand-new concepts in the decentralized finance space that have emerged!
1. Yield Farming:
For traders with knowledge who are ready to take risks, there is yield farming that allows users to scan through different defi tokens, seeking opportunities for bigger returns.
2. Liquidity mining:
When defi apps motivate users to come to their platform with free tokens, the concept is called liquidity mining. Moreover, it is the most buzzy type of yield farming as well.
3. Composability:
Defi applications are basically open source, meaning that the code behind them is public for just about anyone to see. As such, these applications can be utilized for composing new applications with codes that act like building blocks.
4. Money Legos:
Taking the idea of ‘composability’ from a different angle, defi applications are much like Legos, the building blocks that kids click together for constructing vehicles, buildings, and so on. Similarly, defi applications can be put together much like Legos for building any new financial product.
Is It Safe To Invest In Defi?
So, is it safe to invest in Defi? Not really! It is kinda risky to invest in decentralized finance. There are many people who think that decentralized finance is the future of crypto and finance. As a result, investing in such a disruptive technology is a good idea since it can lead to huge profits.
However, the truth is that it is difficult for any newcomer to actually separate all the good projects from the bad ones. Moreover, there have recently been more bad projects than good ones.
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