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Decentralized Finance- a gateway to future Finance

Updated: Apr 19, 2021

This topic contains

  1. How DeFi works?

  2. The future of Defi:

Do you remember how cryptocurrency is liable to make money and payments accessible around the world? Decentralized finance is level up to that. All you need is an internet connection and you are done. You got an alternative to all the financial services that exist, from savings to trading, insurance to trading, and whatnot. Sounds great! Isn’t it?

Defi is an acronym for ‘decentralized finance’. Several concepts such s cryptocurrency and blockchains are part of it. The purpose of DeFi is a disruption of financial intermediaries.

The idea of DeFi is inspired by ‘blockchain’. This technology makes bitcoins function. Bitcoin is a digital currency, which allows the entities to hold a copy of numerous transaction histories, controlled and managed by a central source. These centralized systems limit the speed of transactions along with their sophistication. This gives users less direct control over money. DeFi on the other hand expands the use of blockchain from simple transfer to complex financial use.

To simplify this, When you use your credit card to pay for groceries you just purchased from a departmental store, there is an institution in the middle with the power to stop, pause or record the transaction in its private database. With bitcoins, these institutions are thrown out of the picture. And these purchases are just one type of transaction that big firms do. There is much more on the list such as insurance, loans, crowdfunding, etc, which are controlled by deFi.

How DeFi works?

Defi work on contract blockchain, like Ethereum. Numerous applications which are ‘DeFi’ are built on top of Etherium. It is the world’s second-largest cryptocurrency platform. It is easy to use in comparison to that bitcoin. Also known as ‘Smart contracts’, DeFi programs run on blockchains that can execute automatically when conditions are fulfilled. The programs are what we call Decentralized Financing, Decentralized apps, or Dapps. Therefore, Dapp is just an app built on decentralized technology.

What makes ‘Dapps’ different from those of traditional banks?

  • Dapps do not particularly operate as an institution managed by employees, but these are smart codes. For example, “Send money to Mr. Xyz on Tuesday if it rains” is possible through codes. Once smart code is created it can operate itself with minimum human interference.

  • Anyone on the blockchain can audit the code. As transparent as a glass, isn’t it? This function creates trust with users. All the transactions are public, i.e. open for anyone to inspect. To protect your privacy, the transactions are not tied directly to your real-life identity.

  • Dapps are made available throughout the world. In spite of the fact that you’re in China or Japan, you have access to the same network. However there might be local regulations, but most apps are available for everyone.

  • ‘DeFi applications are for everyone by anyone’. It means that anyone can create an application or make an account on these applications.

  • DeFi apps provide a flexible user experience.

A few most popular apps are as follows-

  • Borrow and Lend: Compound

  • Stablecoin and Decentralized Reserve Bank: MakerDAO

  • Automated Token Exchange: Uniswap

  • Prediction Markets: Augur

  • Synthetic Assets: Synthetix

What are some new DeFi contracts?

  • Yield Farming: This is for those traders, who are open to risk. Here, users have an opportunity to scan through various DeFi tokens to look for high returns.

  • Liquidity Mining: DeFi applications entice users to their platform. They simply offer free tokens to do that.

The future of Defi:

  • Money has been a part of the world since human history. Cryptocurrency is the latest variant, in this field. It is no surprise that we see it as a future payment system. Issuance, exchange, borrowing, lending, derivatives, etc are already built on crypto. What’s next then? Earlier, cryptos worked on collaterals, ie, You needed to own crypto and provide it as collateral to borrow more of them.

  • The next innovation comes in the insurance sector. A number of Defi loans are over-collateralized, i.e the loans are highly protected as they are backed by a high-value asset. Multiple teams like Nexus Mutual are building decentralized insurance.

A better user experience is the next big thing. The latest DeFi applications prioritize the designs and ease of use. This would take open finance to a wide audience.

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