What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is an ecosystem of financial applications that are built on top of blockchain networks. DeFi refers to the digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. The core aim of Decentralized Finance is to create a permissionless and transparent financial system that is open to everybody and will become available for operation without relying on any intermediaries or central authority. This type of system can only be achieved with the help of our new technologies such as blockchain, internet and cryptography. Putting all these technologies together makes it easier to build an open source decentralized financial system that could be operated without the need for central authorities.
Defi makes it possible for everyone to take charge and be in control of their financial well-being, individuals would take control over their assets and they will be able to interact with the ecosystem through the Dapps. In short, Defi system allows individuals to be able to verify every transaction that occurs on the blockchain.
There are so many benefits that accompany the "Decentralized Finance (Defi)" and one of it is for us to have easy access to financial services. This will help many people especially the kind of people that don't have access to centralized financial systems like banks and co.
Advantages of Defi
It is quite visible to everybody that centralized finance only depends on institutions like banks to provide arbitration and act as an intermediary. It is never the same with the Defi. Decentralized Finance applications don't need arbitrators nor any intermediaries for it to function, rather the smart contract stands to resolve any dispute while everyone maintains and controls their funds. Therefore, Defi reduces the costs associated with arbitration and intermediary, thereby providing a more frictionless financial system.
There is a point of failure in the traditional finance system, but nothing of such in a Defi system. The Defi financial services are incorporated on top of blockchains, a technology known to have eliminated all points of failure. The Blockchain helps in recording all data and spreads across different nodes. This type of technology makes it difficult for interdict to occur and there won't be potential of any shutdown.
There is another notable advantage of Defi as an open source ecosystem. Defi helps individuals to easily have access to finance services. The centralized financial system services is not available for everybody especially in the rural area, they never extend their services to a community with low income. Defi has come to make life become more easier for everyone including low income earner to enjoy adequate financial services
Benefits of Defi
There are so many benefits of Defi and many of them are attributed to the characteristics that blockchain technology possesses. So I am going to analyze all one at a time for us to understand everything.
The benefits of Defi are:
Autonomy
Defi offers an autonomy ecosystem whereas you all alone be in possession of all your money and assets. There won't be centralized authority monitoring your assets, they won't be able to freeze your account nor block your transaction. No one will know your worth and nobody can seize your assets because you have autonomy over every pertaining to yourself in the Defi ecosystem.
Accessibility
Defi makes it easier for everyone to get access to seamless and transparent financial services. From the recent research I made, I came to realize that there are nothing less than 1.7 billion unbanked people in the world. It is so cruel for such a population not to have to bank or other financial institutions. Therefore, there's tendency that these people will pursue any financial opportunities since they could not have access to financial services. Defi is simply the solution to these challenges the centralized financial institutions can't offer the services that will cover up to that population. However, with just a Defi DApps, everyone can get access to financial services and operate without the involvement or charges of intermediaries.
Transparency
Decentralized Finance (Defi) is a transparent and honest ecosystem. All DeFi data can be viewed publicly because everything was built on blockchain technology. In Defi ecosystem, users can track a transaction, know the accurate loan rates and easily check the reserves of a DeFi bank.
Tradability
Tradable assets can be created and these tokenized assets give more value to Defi ecosystem. DeFi enables users and investors to trade a portion of their assets, unlike the traditional finance system that only enables investors to commit to an entire high-value investment which many could not be afforded. So Defi opens investment opportunities to everybody using the system either you are financially bouyants or you are still an average investor.
Use Cases for Defi
- Borrowing & Lending
There are so many applications of Defi and the most popular one is "open lending protocols" which is one of the Defi ecosystem. Defi profound a decentralized way for people to borrow and lend money. The Defi open lending and borrowing protocol is far better than the traditional credit system in the sense that, it service is more effective than the centralized credit system. Some of the features the lending and borrowing protocol has but the traditional credit system don't have are:
- It can process instant transaction settlement
- There is ability to collateralize digital assets
- There is no credit checks
- Lastly, there is potential for standardization to occur in the future.
This lending and borrowing services is really a welcome development because it was built on open blockchains which doesn't had a trust challenges i.e the issue of trust is minimized and there will be guarantee of cryptographic verification methods. The lending protocol helps in reducing the risk that involves lending and borrowing; again this new protocol will make everyone have easy access to loans at a cheaper rate and at a convenient time.
- Monetary Banking Services
Defi offers monetary banking services through the Dapp and it is one of the use cases of Defi. The Defi offer monetary banking services which includes mortgages, insurance and issuance of stablecoins (a cryptocurrency with stable price that is usually pegged to real world assets). Insuance of stablecoin is important due to fluctuations of cryptocurrency price and it can be done in a decentralized way without the utterance of the central body. The Defi process of getting mortgages is not expensive nor consumes more time because there is no need of intermediaries, but just the smart contract. No need of paying any legal fees unlike the traditional way of earning mortgage which is time consuming and also expensive. Furthermore, concerning the issue of Insurance services on Defi, it does not require intermediaries too, rather the risks are distributed between all the participants.
- Decentralized Marketplaces
Decentralized marketplace is another use case for Defi. The decentralized marketplace provides more opportunities for financial innovation. This segment allows us to trade our digital assets without the involvement of intermediaries and we will also be in charge of our funds. The decentralized exchanges (DEXes) make trade to occur only between the users wallet using smart contracts. Meanwhile, such DEX will attract lower trading fees which are more encouraging than the trading fee of centralized exchange.
In Conclusion!
DeFi presents a new open financial system that is unconventional of the recent infrastructure. Defi allows the individuals to manage their entire financial instruments without any centralized authority. A development like Defi needs to be emulated because the innovation will prevent yardstick of censorship and prejudice happening across the globe. Defi is creating a financial service that is entirely different from the traditional financial system. If everything goes as its plan, I expect Defi to take power from the current centralized financial institutions and hand it over to individuals.
DeFi Protocols Available on CoinEx
CoinEx is a global and professional cryptocurrency exchange service. There are several protocols within DeFi available on CoinEx. They are:
Chainlink - LINK
Yearn.Finance - YFI
Uma - UMA
Aave - LEND
Synthetix Network - SNX
Maker - MKR
Dai - DAI
Compound - COMP
Ox - ZRX
Loopring - LRC
Ren - REN
SushiSwap - SUSHI
Kyber Network - KNC
Augur - REP
Balancer - BAL
Reserve Right - RSR
Numeraire - NMR
Bitshares - BTS
Curve Dao Token - CRV
Just - JST
Bancor - BNT
Melon - MLN
Dia - DIA
Swerve - SWRV
Fusion - FSN
AirSwap - AST
Hydro protocol - HOT
Jarvis Network - JRT
DXdao - DXD
In my next article, we will look at some of these projects that dive into the technology.