{"id":6906,"date":"2021-03-25T20:32:39","date_gmt":"2021-03-26T03:32:39","guid":{"rendered":"https:\/\/maccelerator.la\/?p=6906"},"modified":"2021-11-12T09:50:23","modified_gmt":"2021-11-12T17:50:23","slug":"what-is-defi","status":"publish","type":"post","link":"https:\/\/maccelerator.la\/en\/blog\/blockchain\/what-is-defi\/","title":{"rendered":"What is DeFi?"},"content":{"rendered":"\n

Decentralized Finance<\/strong>, called \u201cDeFi<\/em>\u201d for short, is a term that\u2019s used to describe the various financial applications in cryptocurrency or blockchain that focused on disrupting financial intermediaries. <\/p>\n\n\n\n

That means instead of relying on banks, credit unions, etc. it operates independently. Users can trade, invest, transfer, and transact peer to peer using digital assets and cryptocurrencies through automated smart contracts. <\/p>\n\n\n\n

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What is DeFi?<\/h2>\n\n\n\n

DeFi builds upon the ideas behind blockchain like Bitcoin which enables several entities to have a copy of historical transactions so it\u2019s not controlled by one single source. <\/p>\n\n\n\n

This is relevant because centralized systems<\/strong> and human gatekeepers<\/strong> can slow down processes and users don\u2019t have as much control<\/strong> over their money.  What\u2019s unique about Defi is that it expands on the use of blockchain to offer more complex financial use cases<\/em>. <\/p>\n\n\n\n

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Think of legacy digital payment methods as those run by Visa<\/strong> or Mastercard<\/strong>. They act as the middlemen in transactions. For example, let\u2019s say you go out for lunch at a local sandwich shop. When you use a credit card to pay for your food, there\u2019s a financial institution that is in the middle of the transaction between you and the merchant. <\/p>\n\n\n\n

This financial institution has control over the transaction which enables them to stop or pause it. Recording of the transaction occurs in their private ledger. Bitcoin and other digital-native assets cut these institutions out. <\/p>\n\n\n\n

Cutting out the middleman from these direct purchases is among the reasons why DeFi is beneficial. DeFi also seeks to remove them from other financial applications including loans, crowdfunding, derivatives, betting, and insurance<\/strong>. <\/p>\n\n\n\n

The costs are reduced and the speed of these financial applications is increased by eliminating these intermediaries. The idea<\/a> of DeFi<\/strong> was previously known as \u201copen finance<\/em>\u201d for these reasons. <\/p>\n\n\n\n

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Scope and Types of Applications of DeFi<\/h2>\n\n\n\n

Even though other trends<\/a> and currencies are emerging, currently the majority of applications that consider themselves DeFi<\/strong> are built on top of Ethereum<\/em><\/strong>. This cryptocurrency is the second largest in the world. What sets it apart from Bitcoin\u2019s platform is that it’s easier to build other types of decentralized applications. <\/p>\n\n\n\n

Ethereum can go beyond simple transactions to offer complex financial use cases. Many of these were highlighted originally in 2013 by Ethereum\u2019s creator Vitalik Buterin. <\/p>\n\n\n\n

These complex financial transactions can happen because of Ethereum\u2019s platform for smart contracts. These contracts will automatically execute transactions once certain conditions are met. <\/p>\n\n\n\n

Solidity and other Ethereum programming languages are designed to create and deploy these smart contacts.<\/p>\n\n\n\n

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Now let\u2019s say that you want to send money to a friend on Saturday. But you only want it to be sent if the Lakers win the game against the Celtics as reported on ESPN.com. A smart contract has these rules written as such<\/strong>. <\/p>\n\n\n\n

The total value locked<\/strong> (TVL) rose sharply during the \u201cDeFi Summer<\/strong><\/em>\u201d in 2020. During this industry boom, smart contracts went from being worth a few hundred million dollars to $20 billion U.S. dollars in a few months. Compared to the traditional financial system, the DeFi space is still small. But its growth<\/a> doesn\u2019t seem to be slowing down and interest has only risen.<\/p>\n\n\n\n

Here are some other DeFi applications that are found today discussed below:<\/p>\n\n\n\n

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Decentralized Exchanges<\/h2>\n\n\n\n

If you want to exchange your currency for another, decentralized changes<\/strong> can help you accomplish this. This includes the U.S. dollar, foreign currencies, bitcoin, ether, etc. <\/p>\n\n\n\n

That means you can take your U.S. dollars and exchange them for etherium or your etherium for bitcoin. Users that want to directly trade their cryptocurrencies for another without having to use an intermediary typically prefer this type of exchange. <\/p>\n\n\n\n

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Prediction Markets<\/h2>\n\n\n\n

The DeFi version of betting on the outcome of a future event removes the intermediaries from the picture. It\u2019s among the first applications of DeFi that exists. This type of prediction market seeks to have the same functionality as non-DeFi versions offer. <\/p>\n\n\n\n

DeFi prediction<\/strong> markets can often provide better outcomes than traditional methods. When prediction markets run in a centralized manner, they are often shut down by governments. This offers DeFi the potential to spark interest in using this method as an alternative. <\/p>\n\n\n\n

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Lending Platforms<\/h2>\n\n\n\n

Using smart contracts, these platforms remove banks and other intermediaries that are between the lender and borrower. This is one of the use cases that is rapidly growing in the cryptocurrency ecosystem is DeFi loans. <\/p>\n\n\n\n

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This allows crypto holders to earn interest on assets they lend to others. Borrowers must provide collateral that\u2019s valued above the loan to protect from price fluctuations. <\/p>\n\n\n\n

This collateral is typically ether<\/strong> which is the token behind Ethereum<\/strong>. Users don\u2019t have to provide their identity or other typical information such as their credit score which is typically provided when taking out a non-DeFi loan.<\/p>\n\n\n\n

The compound<\/b> is one of the most popular platforms available. It allows users to borrow or offer their own loans using cryptocurrencies.\u00a0 The interest rates are set using algorithms in a way that they increase as there is a higher demand to borrow a cryptocurrency.<\/p>\n\n\n\n

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\u201cWrapped\u201d bitcoins (WBTC)<\/h2>\n\n\n\n

Using this method of sending bitcoin through the Ethereum network allows it to be used directly in their DeFi system. Users earn interest in bitcoin that\u2019s lent out using the leading platforms discussed above.<\/p>\n\n\n\n

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Stablecoins<\/h2>\n\n\n\n

This is a cryptocurrency that is pegged to a non-crypto currency asset<\/a> to stabilize its price. For example, it could be tied to the euro or the U.S. dollar. The price fluctuations that occur with cryptocurrencies are sharper than what\u2019s experienced with fiat money<\/em>. This can make it challenging for people who want stability in their money\u2019s value. Stablecoins that are redeemable in currency, fiat money, or commodities are considered backed<\/strong>. <\/p>\n\n\n\n

Ethereum and Bitcoin are the two largest DeFi applications that are controlled by large networks of computers instead of individual computers.<\/p>\n\n\n\n

For example, Dai<\/strong> has gained popularity to become the third most widely used DeFi application. It is a stable coin cryptocurrency with the purpose of keeping its value as close to 1:1 as the U.S. dollar. It uses an automated system of smart contracts on the Ethereum blockchain to do this.\u00a0<\/p>\n\n\n\n

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Other Applications<\/h2>\n\n\n\n

The applications that were mentioned above are those that have helped shape DeFi. There are new concepts that have developed more recently that further diversify how it’s applied to the industry including:<\/p>\n\n\n\n