What is DeFi?

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What is DeFi?

Defi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain aimed at disrupting financial intermediaries. DeFi is inspired by blockchain, the technology behind Bitcoin digital currency, which allows multiple entities to keep a copy of transaction history, meaning it is not controlled by a single central source. This is important because centralized systems and human controllers can limit the speed and sophistication of transactions while giving users less direct control over their money. DeFi is distinct because it extends the use of blockchain from simple value transfer to more complex financial use cases.

what is defi

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The industry exploded in 2020 during ‘DeFi Summer’, where the total locked-in value (TVL) in DeFi smart contracts rose sharply from a few hundred million dollars to over $ 20 billion in just a few months. . While still small compared to the traditional financial system, interest and investment in the space doesn’t seem to be slowing down any time soon. In a nutshell, DeFi is an open, permissionless, borderless financial system.

Another distinct feature of DeFi is that it extends the blockchain from simple transfers of data or value to more complex financial use cases such as trading, lending, yield farming, flash lending, and derivatives. 

Where does DeFi come from?

While the term DeFi took off in the summer of 2020, the story really started with Bitcoin (BTC). Bitcoin, by design, is inherently decentralized and gave rise to the idea of ​​DLT as a way to create decentralized networks for people to transact.

When Bitcoin was first launched in 2009 by anonymous cryptographer Satoshi Nakamoto, people first started trading on a decentralized, crypto-based peer-to-peer network. It is this use of blockchain that has developed the trillion-dollar cryptocurrency ecosystem we see today.

In just 12 years, Bitcoin has created a whole new financial system worth over $ 800 billion and a new set of financial ideals based on transparency and freedom.

Satoshi Nakamoto’s vision was to give people back their freedom through the P2P financial system. Bitcoin was the first currency to achieve this goal, but this is just one example. While bitcoin itself is the mainstay of DeFi, it is only the first chapter of the story. After 2009, other networks began to emerge with a similar approach to the creation of a new financial system.

Where is DeFi and how to access it?

The most used blockchain is Ethereum. This is where the vast majority of DeFi apps are located and where billions of transactions take place every week.

The Ethereum network is often known as “the next Internet” because of its ability to decentralize many services, especially financial services, and bring communities together around the world.

Of the hundreds of decentralized applications (dApps) available on the Ethereum blockchain, the top ten account for over one million monthly users, and the network consistently attracts a 24-hour trading volume of over $ 35 billion.

Ether cryptocurrency (ETH) serves as fuel for the network as each transaction incurs a fee which is used to incentivize those who build and maintain the network.

The rapid increase in the number of users on the network, coupled with the sharp rise in ether’s price, has caused increased “gas” fees charged for making transactions. The issue of scalability is the main limitation of the network as it begins its transition to Ethereum 2.0 in 2021.

What are the advantages of DeFi?

Decentralized finance gives users the flexibility to transact and trade anytime, anywhere with just an internet connection.

The most immediate benefits of DeFi are instant or extremely fast transfers and significantly reduced fees and charges. Additionally, since there are fewer middlemen who take a slice of the financial pie, users receive additional additional benefits not seen in traditional finance. For example, DeFi loan protocols typically offer much higher interest rates for deposits as well as lower fees and more favorable terms on loans and lines of credit.

The DeFi movement promises to bring many benefits to clients and investors, including eliminating intermediaries and central oversight, making financial markets more accessible to retail investors, and creating new investment opportunities. To achieve their lofty ambitions, DeFi developers use some fundamental properties of blockchain technology.

DeFi offers the possibility of giving equitable access to financial services. There are millions of people who do not have access to financial services due to isolation, lack of funds, political oppression, etc.

Smart contracts and the future of global finance

A smart contract is a self-executing piece of software that is managed by a P2P network of computers. Smart contracts are efficient rights management tools that provide a coordination and enforcement framework for agreements between network participants, without the need for traditional legal contracts. They can be used to formalize simple agreements between two parties, the bylaws of an organization or to create tokens.

The future of decentralized finance looks very healthy. As the world hurdles more towards a digital and decentralized future, we are already seeing token assets, including digital gold, non-fungible tokens (NFTs) and works of art, become more mainstream as many governments around the world are seeking to establish central bank digital currencies (CBDCs).

The use cases for smart contracts are exponential, ranging from DeFi to gaming, real world tokenized assets, conditional payments, gaming and betting apps, and prediction markets.

As the way individuals and organizations interact, exchange information, and access financial services continue to be revolutionized by decentralized technology, smart contracts and DeFi will continue to create transparency and financial freedom.

Closing Thoughts 

We make sure to balance the opportunities with the risks. Our research explores the main risk factors DeFi will face over the next few years. We conclude by looking ahead and trying to identify winners and losers.

Who are We?

We SoluLab, a reputed blockchain development company, are concerned with the growth of DeFi platforms, and their Native Tokens, We support blockchain projects and businesses to create DeFi Tokens on ERC20 Standard. For any support we are ready to be in touch with you! Feel free to connect with Us!

By |2021-04-12T10:01:34+00:00March 22nd, 2021|Blockchain|Comments Off on What is DeFi?

About the Author:

Sonal Mehta is a Content Lead at Solulab, USA based leading Blockchain Technology, mobile apps and software development agency, started by Ex vice president of Goldman Sachs, USA and Ex iOS lead engineer of Citrix. Solulab help build startups - we are a no-sweat technical partner for early stage entrepreneurs to launch ideas from scratch and for later stage startups to build more quickly and affordably.

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