Decentralized Finance, also known as DeFi, utilizes the power of cryptocurrency and blockchain technology to provide financial services. With more than $167 billion locked in DeFi platforms and more than 4 million users. It has never been a greater time to explore the potential of DeFi.
Most Popular Uses for DeFi
DeFi intends to provide never-before-seen equity to financial services by removing centralized parties from the equation. This fosters peer-to-peer relationships that can supply a complete range of financial services. Some of the best crypto products can help facilitate ease of use. Most prominently this can facilitate: lending, borrowing, interest-bearing assets, and provable ownership of assets.
- Decentralized Exchanges (DEX) for swapping one crypto token for another
- Open lending platforms
- digital asset staking are among the most common use-cases
- Though many DeFi platforms provide true utility to users, there are also numerous scams. Due diligence is highly advised before interacting with DeFi protocols.
Centralized Finance Today
Today, nearly every element of finance, in particular asset trading and lending, is run through a centralized system. This is approved by regulating bodies, insurers, and more. Due to the burecratic process, finance is bogged down with necessary, but profit-eating fees. Routine customers need to navigate intermediaries to gain access to each part of the financial ecosystem. This includes everything from simple deposits, checking accounts, to more complicated contracts, such as car loans, mortgages, securities, etc.
In the United States, these regulatory bodies include the Federal Reserve and Securities and Exchange Commission, or SEC. They set the policies for the financial ecosystem, without the input of its citizens and users. There are indirect ways that “the Fed” modifies their policies on behalf of policymakers, but are for all intents and purposes, a world of their own.
Therefore, there are very few methods for customers to access financial and capital solutions directly. They cannot bypass intermediaries like exchanges, banks, as well as lending institutions, who earn a portion of every economic as well as financial purchase as profit. All of us need to pay to play. The only way to bypass them would be to barter, even then the IRS regulates bartering transactions!
You could think, “Hey, I currently do this when I send my friend’s cash with Venmo, PayPal, or CashApp.” But you don’t. You still have to have a bank account or debit card connected to those applications to send out funds, so these peer-to-peer payments are still reliant on central monetary middlemen to work.
Example: Increased Carrying Costs
Here’s how that might play out. Today, you deposit into an online savings account to earn a 0.50% interest rate. The financial institution receives the deposit and lends it to someone else to earn 3% APY. The bank pockets the 2.5% profit and pays you 0.5%. With DeFi, the rules are inscribed in the smart contract and completely transparent. It is not clear in the hundreds of pages of fine print what the banks are doing with you money.
The New Global Financial System: Decentralized Financing
DeFi challenges the current centralized monetary system by disempowering intermediaries and empowering everyday users through smart contracts and the blockchain.
DeFi operates separate from a central authority and new changes are voted upon by its users
DeFi is “Banking on the Blockchain”
Blockchain, as well as cryptocurrency, are the core technologies that make it possible for decentralized finance. DeFi is a permissionless, non-judgement way to step over centralized banks with their myraid of regulations in order to provide financial services to the unbanked.
DeFi Takes Crypto to the Next Level
DeFi adds interest-bearing capabilities to crypto
Supporters of DeFi assert that the decentralized blockchain makes financial deals safe and more transparent than the private, nontransparent systems employed in centralized financing.
Blockchain is a decentralized, distributed public journal where financial purchases are recorded in computer code. This may sound scary, but it isn’t. Addresses are pseudonymous, meaning that each address is an alias, not a true identity. People can also have an infinite number of addresses as well.
When we state that blockchain is distributed, that indicates all events utilizing a DeFi application have an identical copy of the public journal, which records every transaction in encrypted code. That secures the system by offering customers anonymity, plus verification of repayments, as well as a document of asset ownership that’s, practically impossible to modify.
When we state blockchain is decentralized, that suggests no intermediary or gatekeeper is handling the system. This means that all transactions are verifiable and visible to all. Transactions are verified and recorded by events that utilize the same blockchain, via a process of addressing complicated mathematics problems as well as including new blocks of deals to the chain.
DeFi has Unlimited Potential
DeFi allows more than simple send and receive transactions. It allows smart contracts to move crypto between places to earn yield. The most important DeFi functions are listed below:
These are cryptocurrency loans that borrow, as well as settle funds in the same purchase. Sound counterintuitive? Here’s just how it functions: Consumers have the prospective to make money by agreeing encoded on the Ethereum blockchain, no lawyers required, that obtains funds, implements a deal as well as repays the funding instantaneously. If the transaction cannot be carried out, or it’ll go to a loss, the funds immediately go back to the loaner. If you do earn a profit, you can pocket it, minus any type of interest costs or fees. Think of flash finances as decentralized arbitrage.
DApps (Decentralized Apps)
DeFI is making its means into a wide variety of basic as well as complicated economic purchases. It’s powered by decentralized applications called “dapps,” or other programs called “procedures.” Dapps, as well as protocols, deal with transactions in both primary cryptocurrencies, Bitcoin, or BTC, as well as Ethereum, or ETH.
- Typical economic purchases. Anything from repayments, trading safeties, and insurance, to financing and loaning, are occurring with DeFi.
- E-wallets. DeFi programmers are creating electronic wallets that can run separately from the biggest cryptocurrency exchanges as well as give financiers accessibility to every little thing from cryptocurrency to blockchain-based games.
- Return harvesting. Referred to as the “rocket fuel” of crypto, DeFi makes it possible for speculative financiers to provide crypto as well as potentially reap huge incentives when the proprietary coins DeFi borrowing systems pay them for consenting to the loan value quickly
Decentralized exchanges (DEXs)
Now, many cryptocurrency financiers use central exchanges like Coinbase or Gemini. DEXs facilitate peer-to-peer economic deals as well as let customers retain control over their cash.
While cryptocurrencies are notoriously unstable, steady coins attempt to maintain their worth by linking them to non-crypto currencies, like the U.S. dollar. By using a smart contract hosted on a blockchain, one can use code to ensure stability to represent other assets, such as the USD.
Non-fungible tokens, or NFTs.
NFTs develop electronic possessions out of generally non-tradable properties, like videos of bang dunks or the first tweet on Twitter. NFTs commodify the formerly uncommodifiable. NFTs are one of the best DeFi use cases and exchange help to add liquidity to this. Since transaction costs are low, many consider it a great way to invest in crypto.
Here are several of the ways dapps and protocols are recently being utilized:
Most Popular DeFi Cryptos
Ethereum is the first cryptocurrency to integrate smart contract functionality. Therefore it has the largest Total Value Locked. While Bitcoin has a larger market cap; Ethereum is more adaptable to a larger selection of usages. This allows a variety of dapps to be used.
A relative newcomer, but Avalanche‘s potential lies in it’s very low fee structure and rapid transaction settlement.
Do Kwon’s brainchild has brought user-friendly functionality to an otherwise nerdy pursuit. Luna promises to make DeFi accessible to all.
DeFi is Making Financial Products Available to All
DeFI’s potential has grown exponentially in 2021 from $30 billion in TVL to $90 billion TVL. This rapidly growing ecosystem will reduce humanity’s reliance on the centralized and biased banking system. They must both co-exist, as the current financial system is too big to fail. For those that are currently using DeFi and need help with accounting, check out our TaxBit Review.