If you follow crypto, chances are you've been hearing a lot more about something called 'DeFi,' or Decentralized Finance. It may be the hot buzzword of the industry today, but it's been one of the fastest growing sectors of the blockchain industry since 2019, with far reaching implications for the future of the finance.
Those implications stem from one key difference: in traditional financial services, 3rd party middlemen are required for for every transaction, while the DeFi movement is trying to eliminate that need. Like crypto overall, the DeFi ecosystem offers an alternatived to most available financial service: savings, lending, trading, insurance, and more.
In this article, we will explore the development of the DeFi ecosystem and explain 2 essential points:
- DeFi vs CeFi, what's the difference?
- DeFi use cases
What is DeFi?
As an abbreviation for "Decentralized Finance", DeFi theoretically allows anyone with Internet access to be able to trade, lend, borrow and bank peer-to-peer without the need for middlemen. Traditional finance relies on third parties such as banks that grant permissions to provide banking services, and payment processors that act as intermediaries. With DeFi, users can enjoy crypto-based banking services and get started right away without the permission of (or need for) banks, credit card companies, credit reporting agencies or central banks.
DeFi offers several advantages versus traditional centralized finance that are linked primarily to the inherent nature of the blockchain:
Programmability: Many DeFi projects rely on highly programmable Smart Contracts to automate execution and enable the creation of new financial instruments and digital assets. This increases the cost effectiveness of DeFi services.
Immutability: Tamper-proof data coordination across a blockchain’s decentralized architecture increases security and auditability.
Permisionless: DeFi enables people who don’t have access to financial services to take part in the global economy. While traditional financial services require administrative paper work, DeFi only requires an internet connection.
DeFi Use Cases
Having only gained traction in the last year, the young DeFi space already covers plenty of traditional financial services.
Crypto Lending & Borrowing
This may be the most popular use case of the ecosystem today. DeFi lending and borrowing platforms allow anyone to borrow and lend as long as they have the appropriate crypto assets to loan out or use as collateral. The most popular method of lending/borrowing in DeFi is the use of lending pools such as Compound or MakerDAO.
Lenders earn interest on the assets deposited in the pool. Borrowers can then take loans from this pool of assets. The interest earned from borrower loans is split up between all of the lenders based on the amount they deposited into the pool.
Decentralized monetary banking services
This area of the DeFi ecosystem covers the issuance of stablecoins, mortgages, and insurance. One of the biggest factors limiting the global adoption of cryptocurrencies is price fluctuations, making many of them impractical for everyday use.
Enter the staggering rise of stablecoins, which are crypto assets programmed to have a consistent value, usually pegged to traditional currencies such as the USD or EURO. Unlike fiat, they have the advantage of being digitally transferable around the world with ease and at much lower costs.
A Decentralized Exchange, or DEX, emulates centralized exchange services. But instead of the exchange 'holding' your assets and executing your trades, a DEX allows users to manage their funds themselves through a series of smart contracts and by using web-browser wallets like MetaMask.
In fact, DEX options are one of the most common user requests we receive here at Quadency, so rest assured that DEX trading is on the roadmap!
What's next for DeFi?
This first generation of decentralized applications, or dApps, relies heavily on collateral: to borrow some crypto you need to already own some. As such, we could see further growth with the tokenization of real-world physical assets for use as collateral.
Source: The Block
These applications may be the most popular today, but there's much more to DeFi than borrowing and lending and innovation in the industrying is moving at laser speed. As we head towards a more decentralized world, the demand for DeFi will continue to evolve and grow.
DeFi is already starting to provide improved alternatives to traditional finance, with new use cases being established every day.
But if the years 2019 and 2020 are remembered as DeFi's initial growth stage, look out in 2021 for the continued rise of DeFi tokens as their dominance plays out in cryptocurrency charts.
- Start Automating Your DeFi Token Trades
- The Exciting Rise of DeFi Tokens
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Disclaimer: The content of this article is for general market education and commentary and are not intended to serve as financial, investment, or any other type of advice.