These days, there are more DeFi apps and platforms than ever. These apps can save businesses and customers a lot of time and money. DeFi platforms started to emerge across most of the financial sectors. As DeFi Dapps becomes more and more popular, you and your business need to understand how these apps and platforms work and how they can change the whole financial sector.
What is DeFi?
DeFi stands for Decentralized Finance; it’s merging blockchain technology and traditional finance/banking. It allows people to use and manage their money without relying on traditional financial institutions in an incredibly open and transparent way. It’s a brand new monetary system that empowers users by offering an alternative to the old financial system. This new system is powered by open and transparent smart contracts that can be used to complete various tasks that are accessed through simple user interfaces. The technology to achieve independence from central authorities is already here—namely the internet, blockchain, and cryptography. In traditional finance, we rely on 3rd party central authorities to verify transactions. However, in the context of the blockchain and cryptos, the users can confirm transactions. DeFi aims to provide permissionless and transparent financial services to anyone and everyone. So the advantages of decentralized financial products are similar to the original vision of public blockchain. They enable access to the financial system and its vital offerings, such as mortgages, insurance, and business loans to anyone in the world. With over 1.7 billion people still unbanked today, such applications could dramatically impact the planet by removing the barriers that have plagued these people for decades. While the full potential of decentralized financial applications is still some years away, there are already many different applications that are in use today. In third world countries, DApps are attempting to provide more life-essential functions such as lending and payments. In more developed countries with fully functioning banking systems, decentralized applications are primarily used for trading, investing, gaming, and gambling.
How does DeFi work?
DeFi’s primary goal is to create a unified and permissionless banking and monetary system on top of which decentralized and censorship-free products can be developed. This system builds on the following pillars.
Open Source Code: The coding is made public. In this way, anyone can audit it and validate its functionality, security, and capabilities.
Transparency: most DeFi apps function on the Ethereum blockchain, meaning all transactions are public.
Global reach: Anyone worldwide can use DeFi apps and platforms. All you need is internet access and a device to connect to the internet.
Permissionless: Users do not have to interact with a bank and instead interact directly with the smart contracts from their cryptocurrency wallets.
Flexibility: If the user does not like the interface of a DeFi dApp, they can easily use another Dapp or even build their own.
What are the use cases of DeFi?
Below are examples of some of the most widely used use cases in the blockchain and cryptocurrency space.
Stablecoins: They are pegged to underlying assets, such as the US dollar, and allow traders and investors a temporary stable store of value and unit of account when trading cryptocurrencies.
Lending and Borrowing Pools: Users looking to earn interest/yield can deposit their funds into a pool. Like the traditional marketplace, they do not place their funds in a lock and can be withdrawn anytime. This creates high liquidity within the system.
Decentralized Exchanges (DEX): Without a need to verify their identity or even sign up, users can truly experience a decentralized platform. Decentralized Exchanges serve as an excellent platform for users wanting to take part in crypto trading while also earning passive income by providing liquidity to markets.
Should I consider investing in DeFi projects?
DeFi tokens have outperformed other cryptos in the past months. DeFi apps are similar to centralized exchange tokens. So, DeFi native tokens benefit and gain value from increased usage of the app or platform’s exchange or service. However, you should study the risks as well when you plan to invest in any crypto project. A considerable risk lies in security issues. Chinese DeFi protocol, dForce, lost $25m of users’ funds during a hack in April. While authorities were able to track the IP and recover the funds, such events still keep a fair share of users away. You should consider investing only in the case if you do your research, and you risk only the amount you can afford to lose if things are going south.
DeFi is making many of the services we know today cheaper, faster, and more efficient. By leveraging decentralized technology to cut out intermediaries and bureaucracy, these financial applications broaden access to the financial system. Eventually, DApps will enable access to essential financial services to billions of people previously excluded from the services we take for granted. Still, many consensus-based applications have centralized components that often are not as transparent as their makers would like us to believe. While growing pains persist, it is exciting to see where the development will go, and we are excited to be part of such a promising future!
Interested in building a DeFi application?
Millions of people use the blockchain to create opportunities and new financial accesses that we’ve never seen before. In this modern age of Decentralized Finance, many companies are exploring DeFi ideas and use cases for further blockchain development. If you’re interested in building a DeFi project, let us help.