What Is DeFi in Crypto?

DeFi, also referred to as decentralized finance, is a rapidly growing sector of the cryptocurrency industry. It is a financial system that runs on a network without central control. DeFi differs from the centralized financial system in that it utilizes smart contracts on blockchain technology, which allows users to carry out financial transactions without having to depend on centralized institutions.

DeFi is a new type of financial system that is not controlled by centralized financial institutions. Instead, it is built on decentralized networks that allow for carrying out complex financial transactions without any intermediaries. This allows for greater accessibility to capital and financial services, as well as trustless transactions and direct negotiation of interest rates.

Defi Explained

DeFi allows users to lend, borrow, trade, and invest in digital assets without having to go through traditional bank systems. This means that users can access any financial product such as loans, insurance, derivatives, and more without having to go through a bank or other financial institution.

How Does DeFi Work?

DeFi works by using smart contracts on blockchain technology to enable decentralized financial transactions. Smart contracts are self-executing digital agreements that are stored on the blockchain and can be used to facilitate transactions between two parties without the need for a third party intermediary.

Users can access capital and financial services directly through DeFi applications, such as savings accounts, peer-to-peer payments, and borrowing and lending platforms. DeFi protocols mitigate the need for a bank account, allowing users to borrow money and earn interest without going through the traditional financial system.

Uses of Decentralized Finance

DeFi applications use smart contracts and the distributed ledger technology (DLT) to offer decentralized versions of a wide range of traditional financial products and services.

Payments

DeFi enables users to send payments directly to each other without involving middlemen like banks or payment processors. With this, transactions are conducted quicker and more effectively, as well as with lower fees.

Stablecoins

A stablecoin is another vital entity that supports and improves the decentralized financial industry. Stablecoins are cryptocurrencies aimed at decreasing the volatility of the price of a traditional or digital asset. They can be pegged to fiat currencies like the USD (USDT, USD Coin), the EURO (Stasis EURO), or other exchange commodities like gold (DGX) or even a crypto asset like BTC (imBTC).

The mechanism and importance of stablecoins in the DeFi industry are vividly demonstrated by the MakerDAO DeFi protocol and its stablecoin DAI. DAI aims to bring financial freedom with no volatility to everyone. You can instantly generate the stablecoin on your terms while getting income for holding DAI.

Lending and borrowing

DeFi borrowing and lending platforms enable users to access capital without needing to work with a traditional financial institution. For those without access to traditional banking services, this can be incredibly helpful.

One of the greatest advantages of decentralized lending marketplaces (besides the lack of any third parties) is that they provide an assurance in the form of cryptographic verification methods. Decentralized lending platforms offer not only loans but also an opportunity to earn interest.

DeFi platforms — dApps and DEXs

Ethereum-based DeFi enables developers to create decentralized apps (dApps) on the Ethereum blockchain, facilitating different types of financial transactions. Similar DeFi apps also exist on a wide variety of other networks, like Solana. A DeFi application is a much more democratic alternative to traditional platforms and games. They are typically powered by utility DeFi tokens.

Decentralized exchanges or DEXs have been on the market for almost 3 years. Being built predominantly on top of the Ethereum blockchain (the most popular platform for a dApp deployment), each decentralized exchange provides real-time digital money trading along with high transaction throughput. They have many advantages, like lack of central authority, total transparency, accessibility, and so on.