Definition Of DeFi / Decentralized Finance

This is all about support given to financial services other than the traditional and centralized ones. We shall study the definition of DeFi and where it apply. Also, we will look into the relationship of decentralized finance with blockchain, cryptocurrency, and finance.

Meaning of Decentralized Finance (DeFi)

On a normal condition, there is a channel through which transactions are carried out financially. There are several parties that engage in the process of credit card payment. This includes the buyers and banks. Middlemen have the potential of terminating transactions at several occasions. Sometimes, the are in charge. When we study the definition of DeFi and where it apply, we expand our coast.

The aim of this is decentralization. It is not allowed to be controlled by one individual (third party) in terms of finance. The reason for the idea of decentralization is for fast and efficient operations. But to some people, it is based on philosophy and politics.

DeFi has a huge number of active members worldwide. This is why we study definition of DeFi and where it apply. It’s major focus is on Ethereum blockchain. This will ease the device of decentralized software. All thanks to the evolution of smart contracts technology, human guidance is no longer needed.

More On Decentralized Finance

It doesn’t end here, both new products an other options for local financial services are under construction too. There are applications that function in DeFi. They are: stablecoins, decentralized exchanges, and peer-to-peer lending services. Basically, prediction markets depends on DeFi for growth.

According to many report analysis, the progress or failure of financial services depends on DeFi. Large investments have already been done so far. However, this is just the starting phase of DeFi although a lot of downfalls have been recorded.

A reminder: DeFi is totally not the same thing with embedded finance or invisible finance. The definition of DeFi and where it apply can vary. The latter is carried out within local fintech and local financial operations. They intend to make banking and payments technology more accessible.

Decentralized Finance (DeFi) Elaborated

Decentralized finance (DeFi) is a financial technology that uses secure distributed ledgers. The technology is still coming up and their ledgers are similar to those of cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.

Below are factors that attracts consumers in DeFi:

  • There are no service charges in its operations unlike banks and other financial firms.
  • Funds are stored in a protected digital wallet rather than in banks.
  • Services are accessed freely, you just need an internet connection.
  • Transfer of money is very fast and swift.

KEY FACTS

  • Decentralized finance eliminates middlemen through its technology.
  • Applications are developed through the characteristics of DeFi. They are: stablecoins, software, and hardware.
  • Investors are still deliberating on the regulation and facilities to be used in DeFi.

Decentralized Finance (DeFi) Made Easy

The study of DeFi helps one to differentiate it from centralized ones.

Concept of Centralized Finance

Let’s take a look at centralized finance. Banks are in charge of your finance, they make profit from service charges. Third parties control the flow of money. For example, a customer bought a gallon of milk with a credit card. The service charge is received from an acquiring bank through a merchant.

The customer’s credit card network receives and clears the charge. What happens next?, the customer’s bank receives a request to release the particular money. They approve the request and the money is sent through the same trend. For the fact that a customer can use credit and debit cards, merchants pay for such. However, this payment is circulated.

This same process is extended to every other financial transaction. In terms of loans, there are delays atimes. Some bank services can’t be accessed while traveling.

There are two main purposes of DeFi. To make transactions very fast. The other is to make transactions more accessible. This is from the definition of DeFi and where it apply.

Concept of Decentralized Finance

The word “Decentralized finance” should be familiar. It uses the evolving technology to remove intermediate channels while transactions are carried out. Instead, a peer-to-peer financial network is used. Their features are security protocols, connectivity, software, and hardware advancements.

Trading, borrowing and lending are all done with a software that operates on the basis of distributed financial databases. Location is not a limiting factor at all. The necessary thing is having an internet connection. A consensus mechanism is used to verify data accessed through a  distributed database.  

DeFi doesn’t consider personality and location when granting anybody access. However, centralized finance is forgone.

Users are in full control of their funds using personal wallets and trading services. Well, it was possible through DeFi applications.

All accounts can be traced despite the fact that third parties are powerless. Some will say “but they don’t know my name”. That’s right, but your transactions are recorded in a distributed ledger. We have entities like governments, law enforcement, or others that protects people’s financial interests.

Operation of DeFi

Decentralized finance and cryptocurrencies make use of the same blockchain technology. A blockchain is simply described as a ledger or database that is shared and protected. It is run by DApps.

Operations done in blockchain are stored in form of blocks while other users verify them. A block is closed and encrypted once agreement is reached. Then another block is created to contain details about the previous block in the group.

The blocks are connected through the details in each preceding block. This feature gives it the name blockchain. Nobody can manipulate blockchains, because a change made in one block affects the rest. The nature of blockchain and other security codes of conduct makes their protection high.

Financial Products One Can Acquire In DeFi

A P2P DeFi transaction is a situation whereby the confirm an agreement between two people. This agreement is on the basis of crypto exchange in return for goods or services. There is also a presence of a middleman. It is one of the important environment for DeFi.

Let’s give an instance with regards to centralized finance. In order to get a loan, you will stress yourself going to banks, another lender, or applying for it. If at all you were successful, interest and service charges awaits you.

However, we also attribute the DeFi aspect of P2P to interests and service charges too. The difference is that, the present you with a lot of options around the world.

In DeFi, there is an algorithm that connects users to the respective peers that meets their demands. This happens after the user must have stated the specific amount of loan using DApp. The lender offers his or her terms and conditions. Your loan processing begins, once the lender grants it.

The state the transaction down in a distributed database. Also, consensus mechanism carry out verification. The also, release the loan. Once the agreed date arrives, the lender has the right to collect back his loan. The same process applies to repayment of loans.

The Nature of DeFi Currency

The purpose of creating DeFi is to use cryptocurrency for transactions. The system is under development. It makes preparation on how to use the current cryptocurrency. The attach stablecoins to real currency like pounds. Majority of the DeFi idea hovers around them.

What Does The Future Hold For DeFi

Decentralized finance is still in its prominent phase. Beginners, believe the can hack the platform anytime. They are also see it a project prone to bad luck and other negative setups. beginning stages of its evolution.

In recent times, the make laws, based on different rights and powers to interpret and apply financial activities. Different sector represents different laws. The unlimited ability to carry out transactions in DeFi questions these laws. People wonder who checkmates malicious activities that takes place in the decentralized space. They also wonder how to implement those laws.

Its nature seems to create issues to those laws in terms of finance. Also, the do not leave out features like system stability, energy requirements, carbon footprint, system upgrades, system maintenance, and hardware failures.

A lot of beginners need to understand the nature of DeFi. However, we do not encourage beginners to operate on it. They need to know all about it. If DeFi continues to prove itself in a positive manner, then financial institutions have no other option than to follow the trend. They will try to make money from it directly or indirectly. However, they won’t forgo their basic means of survival.

What People Want To Know About DeFi

Functions of Decentralized Finance

The definition of DeFi and where it apply cuts across many sectors. DeFi aims at completely dissolving third parties engaged in all financial transactions.

Bitcoin, a Decentralized Finance or not

The use cryptocurrency in DeFi’s blockchain. On the other hand, Bitcoin is a cryptocurrency, therefore it is different from DeFi. It is part of DeFi though.

Meaning of Total Value Locked in DeFi

We can describe Total value locked (TVL) as the sum of all cryptocurrencies staked, loaned, and deposited in a pool. People use sum of all the cryptocurrencies for other financial operation in DeFi. We can apply this to a particular crypto like bitcoin.

 It is very risky to invest in cryptocurrencies and Initial Coin Offerings (“ICOs”).  This article is not a financial advice to invest in cryptocurrencies or ICOs. Always try to do your own research because learning never ends. You can as well consult a qualified professional. The article writers were in possession of BTC and ripple upon writing this. There’s no perfection in the information in this article, so lets be cautious

Decentralized finance (DeFi)

It uses smart contracts to operate on a blockchain. It is independent when offering financial instruments. Their ecosystem creates room for borrowing and lending money from and to others respectively. It also creates room for predicting price movements via derivatives, trading different crypto, insurance against risks, and earning additional interest on a savings account. DeFi makes use of an organized, step by step structure and building blocks. Some of the applications that offers high interest rates are also prone but are to high risk. Earlier this year, assets in DeFi was worth $200 billion

History 

Multi-layered Architecture of the DeFi Stack

Decentralized exchanges is part of the decentralized under Blockchain and FinTech. It serves a second choice of payment with new features. Conversely, centralized (CEXs), such as Coinbase, Huobi, connects buyers and sellers via order books in trading market. They store crypto portfolios in a wallet based on exchanges. The don’t keep DEXs under custod. The leverage the effectiveness of self-executing smart contracts for peer-to-peer trading. However, users still control their private keys and funds.

DEX collectors recently play a big role in the DEX sector. They form hubs that are user-friendly and they bring about various applications and procedures. They also provide tools necessary service rating and comparison. With this, users complete difficult tasks by connecting to various protocols respectively. Multi-layered DeFi structure assigns a specific task to each layer. Examples are CEXs, DEXs and DEX collectors.

DEX collectors have a separate unique layer that lets them reach others through smart contracts. The know this layer as collector layer. Although, they also share the four layers that appears first. They are Settlement layer, Asset layer, Protocol layer and Application layer.

Smart contracts are popular because of the Ethereum blockchain. Other blockchains have used smart contracts years ago. There is a relationship between definition of DeFi and where it apply.

Invention Of MakerDAO

In the past, there was a spectacular DeFi platform responsible for lending . The name is MakerDAO. Stablecoin influences its development. Users can borrow a token attached to the US dollar named Dai. MakerDAO aims to maintain the stable value of Dai in a decentralized and independent manner. This happens via smart contracts. It covers the processes of liquidation and return of loans.

Compound Finance started crediting those that lend and borrow their token with cryptocurrencies. The last two years is the beginning of the operation. People call the crypto, COMP. However, they give their self as interest to their lenders. Individuals use the token to run compound. People can trade it on cryptocurrency exchanges. Other platforms followed the trend and it evolved gradually to “yield farming” or “liquidity mining.” In yield farming, speculators move their cryptocurrency assets from one pool to another in the same platform. They also moved their crypto assets from one platform to another in order to increase their total yield to its peak. Interest and fees doesn’t limit total yield. It extends to worth of tokens received as rewards.

Few years ago, The Washington Post explained the risks involved in decentralized finance and the methods they use. Ethereum encountered a rally in developers that same year due to the increased interest in DeFi. Later that year, Bloomberg made an announcement. DeFi dominates two-thirds of crypto market. It has reference to price changes. It also said that level of DeFi collateral had reached $9 billion.

Some Venture Capitalists

Andreessen Horowitz and Michael Novogratz are both venture capitalists, the works of DeFi have impressed them.

There are 3 perspectives to the future of digital finance.

  • Big Tech, like the Facebook and the digital wallet attached to it.
  • Big rich countries that expose their own digital currencies to testing
  •  Software developers that constructs several applications with the aim of decentralizing finance.

US regulators faced hard time in handling the risks presented by crypto-assets which was at $2.5 trillion.

Some Points to Note Down

DeFi revolves around decentralized applications, also known as DApps. They carry out transactions on distributed ledgers called blockchains. Bitcoin made blockchain technology well known and there has been more adaptations since then. Transactions occur between participants. Smart contract program initiate it. This happens, instead of going through a centralized route. These smart contracts make use of open-source software. A community of developers build it.

A browser extension allows users to access DApps easily. MetaMask is a very good representative, it allows users to have a direct connection with Ethereum through a digital wallet. Linking most of these DApps creates complex financial services. For example, stablecoin holders can lend assets like USD Coin or Dai to a liquidity pool in a protocol like Aave that deals with borrowing or lending. After that, they deposit their own collateral so that other users can borrow them too. The demand for these assets sets a base for automatic adjustment of interest rates by the protocol. Blockchain oracles, provide external data.

Flash loans are loans the give out without collateral. It is a personal amount that the remove and pay back just in one transaction. Aave introduced it. Advantages of flash loans are arbitrage, collateral swap, self-liquidation, and unwinding leveraged positions. In contrast, it can have a disadvantage too such as spot price manipulation in cryptocurrency.  

Uniswap is another good representative of a DeFi protocol. It is a decentralized exchange. It has the ability to trade tokens. The issue it on Ethereum network. Uniswap pays users to form liquidity pools, a part of fees attached to token swapping done within the liquidity pool is theirs. This is much better than going through a centralized manner. There’s no personnel to checkmate users of Uniswap and also those that met the KYC/AML regulations. This is because the members of Uniswap platform controls it and any development team can access the open-source software. The rank of legal access regulators in such platforms will have, becomes doubtful.

Common Errors and Hacking in DeFi

These are things that occur regularly in DeFi. The cannot reverse a blockchain transaction, therefore it needs to treated with caution. Any mistake made might be almost impossible to correct. Let’s take for instance, Yam Finance generated a whooping sum of $750 million within days of its launch. It later crashed due to an error made while coding the platform. In addition, the code for the smart contracts is an open-source software. One can imitate it, to create platforms that are highly challenging. This causes imbalance. It is because a platform , transfers money to the other.

Anonymity can emerge in DeFi platform. Also, you can make losses.

Investor Michael Novogratz defined some DeFi protocols as a Ponzi scheme

However, in 2017, the compare DeFi to the initial coin offering. It was part of a cryptocurrency bubble. Consequently, one needs a level of enlightenment to interact perfectly with DeFi platforms. The lack of customer support sector is also a factor. This is the sole reason why investors who lack exposure are prone to losing money.

50% of crypto crimes linked to DeFi last year. Meanwhile, lack of competence by developers led to the situation. There are 2 forms through which people steal from DeFi ecosystem. Firstly, external hackers steal projects that are prone to attack. Secondly, tricky influencers and developers try to create rug pulls to steal money from their projects after hyping them. Therefore, this hype attracts investors, and they crash the project after achieving their aim.

Decentralized finance (DeFi) represented with just 3 points

  • It is a global and free option to the current financial system.
  • Also, the make investments, borrowing, savings and trading more accessible.
  • Finally, anybody can program with its technology.
See the List of things to learn.
  1. Blockchain Technology
  2. Defi
  3. NFTs
  4. DAOs
  5. Crypto
  6. Web 3.0
  7. Altcoin Tokenomics
  8. Metaverse
  9. Smart Contracts

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