What Is It Decentralized Finance (DeFi)

What is DeFi

  • DeFi projects are blockchains, distributed ledgers for recording transactions. Currently, DeFi activity is growing across different blockchains, but most DeFi services operate on the Ethereum network because of its popularity among developers and its unique capabilities.
  • The second component of DeFi is digital defi coin and assets, or as it is commonly called — tokens. They represent value that can be transferred or sold on the blockchain network.
  • The term DeFi refers to the creation of an open, transparent and free financial services ecosystem. Such an ecosystem is available to any user and works without interference from any government authorities. Cryptocurrency holders keep control over their deposits and savings, they interact in the ecosystem using bodies (P2P), and also use decentralized applications (dapps).
  • The next component that characterizes decentralized finance is wallets. These are software user interfaces. They are used to managing assets and are stored on the blockchain. Using a wallet with a private key, the user controls his crypto assets.
  • Another important component of DeFi is smart contracts. This is blockchain-based programming code. It is a computer algorithm designed to generate, control and provide information about the ownership of something. Smart contract records certain actions and events under pre-defined rules and conditions. Decentralized applications (Dapps) are created based on smart contracts.
  • Next comes such a component as stablecoins (digital assets, the value of which is tied to fiat currency or other assets with a stable value).
  • DeFi’s governance systems have embedded software mechanisms that drive changes to smart contracts or other blockchain protocols. They often base them on tokens that distribute voting rights among stakeholders.

What are DeFi benefits

  1. Transparency. The DeFi marketplace is based on source code. We can check all data at the address of the smart contract and this information is always available to any user.
  2. Inclusiveness. We can launch a DeFi product for any project, without the permission of banks and regulatory and governing bodies.
  3. Ease of access. Using a DeFi product, you can use financial services without intermediaries. Thanks to DeFi, operating costs are significantly reduced and such communities can benefit from the financial services they need.
  4. Modular framework. The framework allows you to create DeFi applications in advanc, making them less complex and more secure to develop and deploy.
  1. The disadvantages of decentralized finance include low system performance. Blockchains are inherently slower, which leads to the creation of additional applications. DeFi application developers are constantly analysing these limitations and optimizing their products.
  2. The high risk of user error. DeFi applications transfer responsibility from the reseller to the user.
  3. Randomness. Finding the right application is a daunting task.

How and where is DeFi used?

Decentralized stablecoins

Landing

Decentralized Exchanges (DEX)

Peer-to-peer Bet Markets

Lottery

Payments

DeFi escrow

The Role of Smart Contracts in DeFi

What are the risks of DeFi?

Systemic risks in the DeFi sector

The risk of hacking smart contracts

Lack of capital in DeFi loans

Popular DeFi projects

Final Words

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