If you are at all familiar with the crypto and/or blockchain industry you may be hearing a recurring term come up over and over again in the past several months. And if you are reading this article, you probably already know it – DeFi. So, what exactly is Defi?
DeFi stands for ‘decentralized finance’ and is a term that encompasses financial services or applications in the crypto or blockchain industry that is aimed at replacing or disrupting existing financial intermediaries, such as central banks or centralized exchanges. Typically, most DeFi applications are being executed via smart contracts, the majority of which is done on the Ethereum blockchain. Smart Contracts, for those of you who are unaware, are automated, enforceable agreements that are free from intermediaries or centralized authorities, which make it the perfect technology to execute P2P DeFi applications or services.
The reason why DeFi has garnered so much attention in recent months is because of the rate of growth the industry has experience in the past few months and its size compared to what it was just 2 years ago.
According to news outlet The Conversation, between September 2017 and August 2020, the DeFi industry exploded and went from $2.1 million to a whopping $6.9 billion. And in the month of August 2020 alone, increased by over $3 billion!
But all this information is rather moot to the average crypto user, just exactly what can they do with DeFi?
What can you do with DeFi?
As mentioned above, DeFi is mostly built on the Ethereum blockchain, currently the second-largest blockchain platform after Bitcoin.
And as you know, the Ethereum blockchain is one of the few popular existing blockchains that IS truly decentralized and as Andreas Antonopoulos so eloquently put it not “bullsh*t.” This means that all applications that are built on the Ethereum blockchain are P2P and do not require an intermediary such as a traditional bank to keep track of everyone’s money and validate their transactions. Most DeFi applications are built on Ethereum specifically because the Ethereum blockchain is great for executing smart contracts, which automatically executes transactions if conditions or a consensus is reached.
Below are some existing uses of DeFi
- Decentralized Exchanges (Dex) – Online exchanges that allow users to exchange cryptos for other cryptos or fiat currencies for cryptos and vice versa. Decentralized Exchanges are currently the most popular Defi application, which allows users to connect directly with each other without an intermediary to exchange currency.
- Borrowing and Lending – Through the use of smart contracts, users can directly borrow or lend money to each other and allow the decentralized network to execute transactions when certain conditions have been met. Users can also set interest rates to their loans and earn money.
- Tokenization of assets – As the name suggests, is turning real-world assets, such as the equity of a business into tokens which then can be bought or sold directly without the need for an intermediary. This allows people from around the world to buy and invest in assets, bypassing financial, political or geographic restrictions.
- Payment applications – Applications that allow customers, merchants and vendors to directly send and receive payment without the need for in intermediary to validate the payments.
- Asset management tools – Applications, tools and services that allow the user to be the sole custodian and secure their financial assets. An example of this would be a decentralized crypto wallet application.
- Insurance – Decentralized insurance platforms that will compensate users directly in the cases of losses, death, illness, damages without the need for an intermediary, such as an insurance company.
- Stablecoins – Cryptocurrencies that are tethered to a real world commodity or fiat currency in order to reduce the volatility of said currency. The most famous example being USDT.
Even for such a new industry, so many different applications have been built using DeFi as many tech-savvy business people see the growth and potential of it. Visit Defiprime to see what other existing DeFi uses currently exist.
The future of DeFi
It is important to ask, what is the future of this emerging industry? There have been so many fads, scams and underwhelming predictions in the blockchain industry that it is difficult to say with 100% certainty that something will have some real impact. However, many experts agree that, to facilitate the growing usage of crypto, a decentralized finance ecosystem must exist to accommodate it.
The whole point of cryptocurrency and blockchain is that it is P2P and direct. It becomes a point of contention for many users when must reconcile the contact between the decentralized crypto world and the regulated, centralized finance world – for example, when you wish to buy cryptocurrency using your credit card. Often times, this point of contact is enough to deter users who wish to buy crypto to remain anonymous. Many people around the world are tired of seemingly arbitrary regulation and restrictions which dictate what they can’t do with their own money. DeFi seems to be a great step forward in the disruption of the current financial institutions and opens up new doors for those who wish to do more with their money but previously could not.