- 29 May 2021
- Posted by: btcbros12
- Categories: Articles, Cryptocurrency, DeFi, Economics, Ethereum, Innovation, NFT, Stablecoins, Technology
What is DeFi?
DeFi, short for Decentralized Finance, is a concept in which the financial system is fully decentralized and is not regulated by a singular government or private institution. DeFi encourages the use of open-source software and decentralized networks to create different types of financial products and services, thereby cutting out the countless middlemen in our legacy economy.
“If you’ve heard the term, but have not yet had the chance to learn more about DeFi, this article aims to give a simple breakdown. If you’re new to cryptocurrencies, you may want to check out our ‘Introduction to DeFi’ guide on our website for a deeper explanation. “
Decentralized Finance is a relatively new idea in the financial spheres, and most people might be hearing about this for the first time in 2021. However, the truth is that when the concept first started taking root in late 2017 but not many people paid attention. It’s the pandemic that managed to make a lot of people think long and hard about where their money comes from and who controls it.
Several fintech experts argue that DeFi is a reaction to the 2008 financial crisis, which exposed the problems that arise with centralized institutions having too much power in an economy. However, the technology at the time could not provide us with any alternatives to the very system we all saw crumbling with our own eyes. With the advent of bitcoin and the concept of a decentralized ledger known as a blockchain, we now have options. The push for DeFi compounded due to the fact that we are in the middle of yet another financial crisis of sorts, and people are more desperate than ever about their money.
DeFi promises to be the democratic solution to the many ills that plague traditional finance. The idea is to have an entire economy built on blockchains, where everyday currency-holders are incentivized to participate by having their computers solve complex mathematical problems to verify transactions. Blockchains, by nature, offer complete transparency and the data on them is immutable by any singular individual, which makes them ideal bedrocks for the decentralized economy.
Salient Features of DeFi that has led to its meteoric rise
The decentralized nature of DeFi institutions and services gives it a number of advantages over its centralized counterparts. DeFi is more efficient, free from censorship, free from monopolization, and borderless. One of the main reasons why DeFi has exploded over the last year is that last bit.
There are no barriers to who can trade in a DeFi institution. Anyone with an internet connection can, in theory, have a piece of the DeFi market. There is no governing entity that can put exclusionary parameters on the system. This facilitates a free, fair, and democratic market, where value transfer is instantaneous as well as overhead-free due to no governing intermediaries.
The legacy economy is too convoluted for most people to grasp. This leaves a lot of room for financial institutions to profit by utilizing the various loopholes within. With Decentralized Finances, the system of borrowing and lending is seamless with the help of smart contracts. Blockchains also offer the parties in the supply chain access to inventory records in real-time and instantaneous payments.
Moreover, the room for further development in DeFi is limitless. Scaling DeFi systems is relatively easy, with newer iterations of blockchains improving upon the speed as well as efficiency of their counterparts. Being decentralized, any changes to the blockchain protocol have to be mandatorily approved by stakeholders so that no one can game the system to their benefit. An example of such an innovation is the Layer2 protocol of Matic/Polygon, improving upon the slow transaction speed of the Ethereum mainchain and reducing gas fees.
Last but not least, the transparent nature of DeFi payments protects transacting parties from fraudulent behaviors, while also allowing for swift response in times of financial crises.
Decentralized Finance comes with its own set of necessary utilities that a user needs to have to navigate the ecosystem. Currently, in order to buy, sell, stake, or trade crypto, you need an e-wallet.
DeFi Wallets are the backbone of the crypto world, and a lot of work is being done to create e-wallets that are compatible with multiple types of cryptocurrencies. Ethereum created the first e-wallet known as “MyEtherWallet”. Within a few short years, several vendors like Coinbase, Exodus, and Robinhood have come up with their own offerings, each with its own set of unique features.
DeFi Wallets are generally non-custodial, and can be used to store, trade, or trade everything from currencies to any digital asset that can be bought or sold using some form of blockchain technology. They are the equivalent of a bank account in the traditional economy. The advantage is that, unlike bank accounts, there is absolutely no risk of moratoriums or interest rate fluctuations as there is no central governing body to dictate what you can do with the contents of your e-wallet.
The Rise of StableCoins
In their earliest stages, cryptocurrencies were not tied to any assets, so their value was subject to fluctuation pretty frequently. The rise of stablecoins has solved this issue to a great extent while bringing cryptos one step closer to real-world acceptance and usage. A stablecoin is any digital currency that is backed by a reserve asset like the US dollar or gold. Prominent examples of stablecoins include USD Tether, whose value is tied to the US dollar, and Digital Gold Coin (DGX), which derives its value from gold.
The rise of stablecoins has been crucial to address the issue of banknotes and cash losing ground in general payment systems. Statistics show that cash usage in the United States, United Kingdom, the Netherlands, and Sweden, among other industrialized nations, account for less than 50% of all transactions. Central Banks have therefore been under pressure to find alternatives for banknotes, and stablecoins are a front-running solution.
Stablecoins have greatly pushed crypto into the mainstream, with big banks now taking note. Furthermore, with NFTs and other digital assets becoming billion-dollar industries, cryptocurrencies such as Ethereum and its competitors like Cardano, Solana, and Monero have also become increasingly stable. At the moment, numerous crypto-backed projects are underway to find ways to tie cryptocurrencies into the real world such that DeFi becomes the norm in a few years.
Decentralized Finance is only getting started. As DeFi systems continue to patch the holes that the traditional economy is just too ineffectual to solve, we shall see mainstream acceptance of DeFi and cryptocurrencies. Thus, the future of DeFi only gets better from here.
We hope you enjoyed reading this article! If you did, please feel free to like, share or comment below. Thank You!
To get a clearer understanding of basic DeFi principles, you can download our FREE Introduction to DeFi guide here!