For those unfamiliar with Decentralized Finance, DeFi describes a concept- or a type of Decentralized Application - which allows users to manage an entire spectrum of financial operations by utilizing blockchain technology and cryptocurrency, and eliminates the need for third-party involvement. Having said that, DeFi is drastically different from the traditional way of financial communication we know.
Centralized Finance
Money has been the means of human exchange for centuries, with the first ever known currency - the Mesopotamian shekel - being around 5,000 years old. This is also the time when the concept behind centralized finance was conceived.
In centralized finance, the control over money is appointed to financial institutions, e.g. banks, which play the role of middlemen and have an overlapping goal of earning a profit (hence, they like to charge fees).
With the introduction of the first cryptocurrency - Bitcoin - things have changed. According to some experts, Bitcoin could become the new, most effective option for storing value, as it does not require a trusted third party to perform operations. Besides, it has purchasing power, liquidity and authority.
At the same time, centralized cryptocurrency exchanges entered the market. Binance, Coinbase, Kraken still remain one of the most important transacting vehicles for millions of crypto holders around the world.
Decentralized Finance
Decentralized Finance came in a bit later. With DeFi, it is possible to conduct transactions with no middlemen involved. As DeFi projects run on blockchain technology, they use consensus mechanisms to verify the data on the network. DeFi provides all kinds of transparent, fast and inexpensive financial services. Smart contracts, supported by blockchain technology, contain the rules of operation written in the form of a traceable code. Any decentralized application offering financial services could be considered a DeFi project.
N.B. Check out Getblock’s guide on how to start a DeFi project
How DeFi is Being Used
DeFi is considered an alternative to traditional CeFi, therefore decentralized financial services make sure to provide the same kind of experience for their users. Let’s check out some of the most prominent examples.
DAI: Decentralized Stablecoin
One of the possible ways of implementing DeFi is by launching stable coins, which aim to minimize the volatility of cryptocurrencies by binding them to non-cryptocurrencies, e.g. USD. DAI is a stable coin based on the Ethereum blockchain and governed through the Maker Platform and MakerDAO. DAI’s goal is to keep its value as close to the US Dollar as possible while being fully decentralized. Launched in 2017, DAI is currently being used by various dApps.
AAVE: Decentralized Liquidity Protocol
Aave is a fully decentralized set of “lending pools”. With Aave users can earn interest, borrow and lend cryptocurrency in a non-custodial way. The services for building dApps are also available on the platform.
Synthetix: Decentralized Synthetic Asset Issuance Protocol
Synthetix is an Ethereum-based decentralized asset insurance protocol, which enables the ability to create synthetic assets - the representations of real-life assets - as tokens. Moreover, there are other services offered by the platform, which became one of the fastest-growing DeFi projects.
PancakeSwap: Decentralized Exchange
PancakeSwap is an example of a decentralized exchange (DEX) built on the BNB Chain. Decentralized exchanges work through the use of market makers and liquidity pools. DEXs provide transparent P2P transactions, which are conducted according to the current trading pair ratio.
Check out Getblock’s full review of PancakeSwap
Decentraland is an example of a DeFi technology-based metaverse game, powered by Ethereum. In Decentraland, players can purchase and trade virtual plots of land with the platform’s utility token - MANA. MANA showed one of the best market performances among metaverse tokens in 2021, when the token’s value rose drastically.
Check out more on the Metaverse games here
The Future of DeFi
DeFi is considered one of the top valuable and most promising technologies associated with the introduction of decentralized applications. As the development of its core elements - blockchain and cryptocurrency - is being actively promoted, we could expect for DeFi to become even more accessible and, perhaps, transform the entire banking industry or, at the very least, become a great addition to the traditional CeFi.
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