Decentralized finance, DeFi is an umbrella term for a variety of applications and projects in the public blockchain space geared toward disrupting the traditional finance world. Inspired by blockchain technology, DeFi is referred to as financial applications built on blockchain technologies, typically using smart contracts. Smart contracts are automated enforceable agreements that do not need intermediaries to execute and can be accessed by anyone with an internet connection.
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How did Defi started
DeFi started in 2009 with the launch of Bitcoin, which was the first p2p digital money built on top of the blockchain network. Through Bitcoin, the idea of ushering transformation in to the traditional financial world using blockchains became an essential next step in the decentralization of legacy financial systems. The launch of Ethereum and, more specifically, smart contracts, in 2015 made it all possible. The Ethereum network is the second generation blockchain that first maximized the potential of this technology within the financial industry. It encouraged businesses and enterprises to build and deploy projects that formed the ecosystem of DeFi.
DeFi consists of applications and peer-to-peer protocols developed on decentralized blockchain networks that require no access rights for easy lending, borrowing, or trading of financial tools. Most DeFi applications today are built using the Ethereum network, but many alternative public networks are emerging that deliver superior speed, scalability, security, and lower costs.
From above we measure smart contracts
smart contracts
Most smart contracts offer Turing Complete programming languages that allow multiple parties to interact with each other, without needing a centralized intermediary. Blockchain’s ability to capitalize on smart contracts has made them ideal platforms to choose when building out financial applications.
Humans bartered initially for goods and services. But, as humans evolved, economies evolved: We invented currency to make it easier to exchange goods and services. Subsequently, coins helped usher in innovations and created better levels of economies. However, progress comes at a cost.
And central authorities have issued currencies that underpin our economies, which eventually gave them more power as more people began to trust them. However, trust has been broken from time to time, which makes people question the centralized authorities' ability to manage said money.
DeFi was developed based on the idea of creating a financial system that is open to everyone and minimizes the need to trust and rely on a central authority.
DeFi brought a plethora of opportunities to bring about a transparent and robust financial system that no single entity controls. But the turning point for financial applications started in 2017, with projects facilitating more functionalities in addition to just money transfer.
So What is Decentralized Finance (DeFi)?
Decentralized Finance (or simply DeFi) refers to an ecosystem of financial applications that are built on top of blockchain networks.
More specifically, the term Decentralized Finance may refer to a movement that aims to create an open-source, permissionless, and transparent financial service ecosystem that is available to everyone and operates without any central authority. The users would maintain full control over their assets and interact with this ecosystem through peer-to-peer (P2P), decentralized applications (dapps).
The core benefit of DeFi is easy access to financial services, especially for those who are isolated from the current financial system. Another potential advantage of DeFi is the modular framework it is built upon - interoperable DeFi applications on public blockchains will potentially create entirely new financial markets, products, and services.
Advantages of DeFi?
Traditional finance relies on institutions such as banks to act as intermediaries, and courts to provide arbitration.
DeFi applications do not need any intermediaries or arbitrators. The code specifies the resolution of every possible dispute, and the users maintain control over their funds at all times. This reduces the costs associated with providing and using these products and allows for a more frictionless financial system.
As these new financial services are deployed on top of blockchains, single points of failure are eliminated. The data is recorded on the blockchain and spread across thousands of nodes, making censorship or the potential shutdown of a service a complicated undertaking.
Since the frameworks for DeFi applications can be built in advance, deploying one becomes much less complicated and much more secure.
Another significant advantage of such an open ecosystem is the ease of access for individuals who otherwise wouldn’t have access to any financial services. Since the traditional financial system relies on the intermediaries making a profit, their services are typically absent from locations with low-income communities. However, with DeFi, the costs are significantly reduced, and low-income individuals can also benefit from a broader range of financial services.
The importance of DeFi?
- Borrowing
- Lending
Open lending protocols are one of the most popular types of applications that are part of the DeFi ecosystem. Open, decentralized borrowing and lending have many advantages over the traditional credit system. These include instant transaction settlement, the ability to collateralize digital assets, no credit checks, and potential standardization in the future.
Since these lending services are built on public blockchains, they minimize the amount of trust required and have the assurance of cryptographic verification methods. Lending marketplaces on the blockchain reduce counterparty risk, make borrowing and lending cheaper, faster, and available to more people.
Monetary banking services.
As DeFi applications are, by definition, financial applications, monetary banking services are an obvious use case for them. These can include the issuance of stablecoins, mortgages, and insurance.
As the blockchain industry is maturing, there is an increased focus on the creation of stablecoins. They are a type of cryptoasset that is usually pegged to a real-world asset but can be transferred digitally with relative ease. As cryptocurrency prices can fluctuate rapidly at times, decentralized stablecoins could be adopted for everyday use as digital cash that is not issued and monitored by a central authority.
Largely because of the number of intermediaries needing to be involved, the process of getting a mortgage is expensive and time-consuming. With the use of smart contracts, underwriting and legal fees may be reduced .
Financial Protocol means the arrangements for forecasting, monitoring and paying sums due under this Agreement, as agreed by the parties. The current Financial Protocol is attached at Appendix One.
Examples of Financial Protocol
Any balances remaining from previous EDFs on the date of entry into force of this Financial Protocol, as well as any amounts that shall be decommitted at a later date from ongoing projects under these Funds, shall be transferred to the 9th EDF and shall be used in accordance with the conditions laid down in this Agreement.
Before the expiry of this Financial Protocol, the Parties shall assess the degree of realisation of commitments and disbursements.
The appointments of the Director and the Deputy Director shall coincide with the five-year duration of the EDF Financial Protocol.
The Centre shall be financed by the European Development Fund, as laid down in the Financial Protocol provided for in Annex I to the Agreement, and by its own sources of revenue, as set out in the Centre’s financial regulation.
Should an ACP State fail to ratify this Agreement or denounce it, the Parties shall adjust the amounts of the resources provided for in the Financial Protocol set out in Annexe.