What is it?
DeFi stands for Decentralized Finance, and it refers to financial services using smart contracts, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology instead.
When does it happen?
In 2020 we’ve seen a big boom in DeFi coins. Most of these coins are financial platforms where you can receive interest for lending your coins. These platforms use Decentralized Finance to find lenders and borrowers and connect them to each other.
Because of the decentralized character, you don’t have to specify your details like name, financial history, or other things. Your collateral is enough to get a loan. Ethereum is leading the market for DeFi applications.
One of the focuses of the DeFi space these days is to build exchanges where users can buy and sell their cryptocurrencies easily, without the need for any central platform. DeFi trade exchanges will link buyers with the sellers, and the interesting part which will benefit both parties is the fact that due to the removal of the middle party, both parties will not have to pay any fees like they did in centralized economic systems. Decentralized exchanges are called DEX for short.
Why should we use DeFi?
DeFi has been the talk of town for the amazing advantages it can add to the current economic system. More decentralization will mean a user will enjoy greater autonomy. The accessibility of funds and trade ability between users will not be dependent on any third party. Above of all, decentralized economic facilities will bring a greater amount of transparency as compared to centralized authorities.
- Everything is online and digital
- Everyone is accepted
- Open-source code
Why should we avoid when using DeFi?
There are some disadvantages that are not very severe and are applicable on an individual level. For example, giving full control of an investment to the users can mean financial disaster, and is often-times a risky idea. Moreover, as is the case with every online application, it opens doors for cyber-attacks which can rob people of their rightful assets.
Which application can apply DeFi?
The most popular types of DeFi applications include:
1. Decentralized exchanges (DEXs): Online exchanges help users exchange currencies for other currencies, whether U.S. dollars for bitcoin or ether for DAI. DEXs are a hot type of exchange, which connects users directly so they can trade cryptocurrencies with one another without trusting an intermediary with their money.
2. Stablecoins: A cryptocurrency that’s tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price.
3. Lending platforms: These platforms use smart contracts to replace intermediaries such as banks that manage lending in the middle.
4. Prediction markets: Markets for betting on the outcome of future events, such as elections. The goal of DeFi versions of prediction markets is to offer the same functionality but without intermediaries.