Decentralized finance (DeFi) has been around since 2017 but only recently has it become mainstream. What does it mean for the future of financial industry services?
DeFi is a term used to describe the combination of blockchain technology and smart contracts to create new financial tools and applications. These applications are built using Ethereum’s ERC20 standard tokens.
In this blog post I’m going to explore what DeFi is, how it works, and how it could change the way we think about money, and of course, answer the question: Is Decentralized Finance the future of blockchain technology. But First, let’s talk about Etherium, which is where all this technology runs.
What is Etherium?
Etherium – The Blockchain platform that powers Decentralised Finance
Etherium is an open-source software project by the same name that runs on top of the ethereum blockchain. The goal of the project is to make it easy to build decentralized apps or dapps which can operate without any central point of failure.
The problem with centralized servers is that they have control over your data. This makes them prone to hacks, attacks, data loss – basically anything that stops you from accessing your own information…
What is Decentralized Finance?
Decentralized Finance is the practice of creating financial products through smart contracts on the blockchain. It allows users to trade in assets like stocks, bonds, cryptocurrencies, and more without having to rely on intermediaries such as banks.
This means lower fees than traditional finance banking solutions, no middlemen, and no third-party interference. In other words, it’s great for consumers!
How Does Decentralized Finance Work?
The idea of decentralized finance is to create a financial system that doesn’t rely on the traditional financial infrastructure. Instead, it uses smart contracts and other blockchain technologies to allow people to make transactions without having to go through banks or third parties. The goal is to provide access to financial services for anyone who wants them, regardless of their bank account or credit history.
How Can You Use Decentralized Finance Today?
You can use decentralized finance today by trading in crypto assets like bitcoin, ether, and others on a decentralized exchange. For example, you might want to buy some eth and then sell it for btc later. Or maybe you want to borrow some eth to invest in a startup.
It’s important to note that there isn’t one single form of decentralized finance. There are many different types of products and services available, including:
Stablecoins
These are digital asset currencies designed to be stable so that they don’t fluctuate in value. They’re backed by real-world assets like gold or fiat currency (US dollar or Euro, etc.).
This makes DeFi much more of a value proposition for those scared of the volatility in crypto.
There are two types of stablecoins:
- Fiat-collateralized coins (e.g. Tether, USDC):
These stablecoins maintain reserves of equivalent value per minted coin (i.e. to mint a new USDC coin, Coinbase must keep $1 in their reserves). USD Coin $USDC is pegged to the U.S. dollar. It is the second-largest stablecoin by market capitalization.
- Crypto-collateralized coins (e.g. DAI):
The value of these stablecoins is pegged via smart protocols voted by DAOs (decentralized autonomous organizations).
Fiat Collateralized Debt Obligations
These are debt instruments that are collateralized by a certain amount of fiat currency. When someone buys CDSOs, they get paid back in cash plus interest.
Borrowing Against Stocks & Cryptocurrencies
If you want to borrow against stock or cryptocurrency, you need to find a lender willing to lend you the funds. Once you’ve found a lender, you’ll sign a contract called a repo agreement.
Repo agreements are similar to loans because both lenders and borrowers agree to pay each other at specified times. However, repos differ from loans in that they aren’t secured by physical property. Repos are instead secured by shares or cryptos.
Leveraged Trading
In leveraged trading, traders take out loans to purchase securities and then immediately sell those securities to generate capital gains. Leveraging increases risk but also provides higher returns.
Cryptocurrency Loans
Cryptocurrency lending has become popular among investors looking to earn high yields while avoiding counterparty risks associated with borrowing in fiat currency.
What are the Features and Benefits of DeFi?
DeFi is an umbrella term used to describe any product built using decentralized finance technology. Here’s what makes these products unique:
No Middleman
With DeFi, you don’t have to deal with central banks or intermediaries when buying or selling your assets. This means lower fees than traditional financial institutions, no middlemen, no third-party interference, and no waiting around for approval.
Low Fees
Because DeFi is based on open source code, its fees are typically much lower than traditional financial institutions. In addition, most DeFi platforms charge only small transaction fees, which further lowers costs.
Security
DeFi protocols are built on top of the Ethereum network, meaning they’re inherently secure. Because they run on public blockchains, they’re transparent and immutable.
Accessibility
Unlike traditional financial institutions, DeFi allows anyone to participate in the economy. Anyone can create their own asset, issue their own loan, or trade their own token.
How Decentralized Finance Is Transforming The Future Of Banking?
Decentralized finance is an emerging technology that allows users to create their own financial products on the Ethereum blockchain. It enables anyone with access to the internet to build decentralized applications, such as lending platforms or derivatives trading systems, without having to rely on banks. DeFi is already being used for everything from peer-to-peer lending to derivatives trading.
While this technology may seem like it’s still in development, there are several projects working on implementing DeFi into real life. Projects like MakerDAO, Compound, Dharma Protocol, and others are all building tools that allow people to use smart contracts to create new financial services.
The Future Of Banks And How They Will Be Changed By Blockchain Technology
Blockchain technology will change banking services forever. While many believe that banks will simply be replaced by apps, we think that the future of banking lies somewhere between the two. We believe that decentralized finance will play a role in the evolution of the industry, but we also think that centralized apps will continue to exist alongside them.
We see three main ways in which blockchain technology will transform the way we interact with our money. First, it will make transactions faster and cheaper. Second, it will enable us to manage our finances more efficiently. Third, it will empower individuals to control their money.
1. Faster Transactions & Cheaper Costs
In order to understand why blockchain technology will revolutionize how we pay and borrow money, we need to first look at how payments work today. When you send someone money via PayPal or Venmo, you are essentially giving up ownership of that amount of money. You are trusting that person to spend the funds correctly. If he spends too much, you lose out. If he doesn’t spend enough, you lose out. Either way, you don’t get paid back what you lent him.
This is where blockchain comes in. With blockchain, you retain full ownership of the funds you lend. Once those funds are spent, they cannot be taken away from you. Instead, you receive a receipt that shows exactly how much was spent and who received the money.
2. More Efficient Money Management
Banks have traditionally been responsible for managing your money. Whether it’s paying bills, saving for retirement, or investing, most of these tasks require you to give up some degree of control over your money. However, when you use a bank account, you do not actually own any of the money deposited into it. Rather, you are just borrowing against it. This means that even though you might earn interest on your savings, you never really own the money itself.
With blockchain, however, you can keep complete control of your money. You can invest it yourself, save it for later, or lend it out to other people. The possibilities are endless.
3. Individuals Control Their Own Finances
Finally, one of the biggest problems with traditional banking is its reliance on third parties. In order to open a checking account, deposit money, or transfer funds, you must go through a number of intermediaries. These include banks, credit unions, and brokerages. Ultimately, they act as gatekeepers that decide whether you qualify for an account, and if so, how much access you should have.
Decentralized finance takes this concept one step further. It allows anyone to become their own bank. No longer do you have to rely on a single intermediary to provide you with access to your money. You can now control your own finances directly.
Are Crypto and DeFi the Future of Finance?
You would have never thought about investing in cryptocurrencies before now. Cryptocurrencies are not just another investment; they’re an entirely new way of doing business online. They offer a completely different set of advantages than traditional investments.
Cryptocurrency’s future may be tied to the success of decentralized financial services (DeFi), which is currently unknown but promising.
In short, decentralized finance (DeFi) uses the blockchain to create new financial products such as loans, bonds, futures contracts, swaps, options, and even insurance policies. Profit opportunities arise from the elimination of intermediary companies such as banks and brokers, which charge transaction costs and regulatory frameworks expenses.
It’s been exciting watching the development of decentralized finance (defi) protocols over the past several years. It has gained traction everywhere from Europe to Asia to North America. The underlying concept is simple: use the power of distributed ledgers to bring transparency and efficiency to financial markets.
The promise of defi or decentralized finance is that it will provide better access to credit, more efficient markets, and greater transparency.
Disadvantages of Decentralized Finance
The main disadvantage of decentralized finance is that it is not regulated by any central authority. This means that it is difficult to know whether the person who is lending money has sufficient funds to cover the loan. Also, since these loans are not backed by any government agency, they may be risky for borrowers.
Decentralized finance is still in its infancy. While some platforms like MakerDAO are working well, others are struggling to find ways to scale without compromising security. For example, one of the biggest challenges in this space is ensuring that lenders do not run out of collateral. If a lender runs out of collateral, then the borrower will not receive the loan.
Another challenge is that many people don’t understand what decentralization really means. Some investors think that because the system is decentralized, there is no need for regulation or oversight. However, this is simply not true. Without proper regulations and oversight, the entire system could collapse.
While decentralized finance is gaining popularity, it’s important to remember that it is still in its early stages. As it develops, we’ll continue to see innovations and improvements.
How Do You Use DeFi?
To start, you need some ETH.
ETH is short for ether, the token used within the ethereum network. Once you’ve got some ETH, you’ll want to get some DAI.
DAI is short for Dai, one of the most popular stablecoins available. It was created by MakerDAO, who also gave us the idea of DeFi in the first place.
Once you’ve got some DAI, you’re ready to go.
You can either buy DAI directly from another user, or you can lend out your ETH and receive DAI back.
When someone wants to borrow your ETH, you send them a request via a smart contract. They then pay you interest on the amount borrowed. If they don’t repay you, you can sell your DAI to cover your losses.
If you want to lend out your ETH instead, you do the opposite. Someone sends you a request for ETH, and you give it to them in return for DAI.
What is a Decentralized Exchange (DEX)?
An automated token exchange (also known as a DEX — Decentralize Exchange) is a cryptocurrency exchange run entirely on smart contracts. There’s no central governing authority that can stop you from trading (like Robinhood) as it’s run via a DAO (more on this later.)
These differ from a central exchange like Coinbase, which stores your crypto for you and holds your private keys for safekeeping. Sushi or Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle trades near the market price.
This enables you to trade popular tokens directly from your wallet without ever sharing any personal information.
Final Thoughts
Consider DeFi like you would the traditional financial system, which is not just about payments alone but about loans, savings, lending, insurance, trading, etc.
Anything you think of when you think of the financial service industry is now being created on the blockchain. Except unlike the traditional banking system of 9-5 hours, fees on top of fees and endless paperwork — DeFi is the opposite.
It’s open 24/7, with no middleman, no central authority, and no paperwork. All transactions are visible on a permanent and public ledger. The only thing you have to worry about is whether or not you will be repaid.
The Future Of Blockchain Technology Is Decentralized Finance
DeFi is here to stay. With the rise of cryptocurrencies, the number of users has increased exponentially. This has led to more demand for decentralized applications and services.
As time goes on, we expect to see more innovation in the space. We already know that we can store data securely and reliably on the blockchain.