What is decentralized financing (DeFi)?

clock Jul 20,2021

DeFi and the way forward

In simpler terms Decentralized Financing (DeFi) is a system where financial products are available on a public decentralized blockchain network. Thus, making their domain user friendly and making no space for middlemen such as brokers and banks. The interface of DeFi does not necessarily require a Social security number, proof of address or a government-issued ID. These protocols have seen tremendous growth over the years, with 2020 hitting the milestone figure of over 12 billion dollars in total locked assets. Such lending helps the consumers to borrow without much hassle.

What is decentralized financing (DeFi)?

It is a collective term for financial services used by anyone having an internet connection. It started with Bitcoin and in many ways Bitcoin was the first DeFi application. It works on ethereum and just like Bitcoin the rules are not amenable and everyone has access. It also makes digital money programmable using smart contracts.

In the 21st century the use of technology in any sector is not new and the same goes with the financial sector as well. Most of the transactions and services are done via technology but still the role is restricted to a certain extent. To bridge the gap between such restricted technologies DeFi plays an important role as it places automation at the front and centre of transactions in the financial service industry. It draws its inspiration from blockchain (technology behind bitcoin). It is distinct in its own way as it expands the use of blockchains from simple value transfer to a more complex one. 

Scope of decentralized financing-

They have a wider scope as they aim to recreate the traditional financing system with crypto currency. With the help of this domain users can lend out crypto currency and can earn interest as a lender. One of the common uses of the application is to lend and to borrow though they are also used in becoming a liquidity provider to a decentralized exchange. In this the interest rates are attractive, the barrier to entry to entry to borrow is low and sometimes, to get a DeFi loan one can provide collateral with other crypto assets. Consumers can also provide their non-fungible tokens as collateral. 

The idea of Decentralized financing was previously known as open finance as the main purpose of it is open financial ecosystem.

Elements of DeFi-

At a larger scale the elements are the same as that of current financial services i.e., they require stable currencies but the elements of DeFi take the form of crypto exchange and lending services. All the components of such a system belong to a software stack having various layers and each of those is meant to do a particular task. One of the defining characteristics is that of composability as the components belonging to each layer can be composed together.

DeFi applications-

  • Decentralized exchanges- These are a kind of exchange that connects the consumers directly with the other party so that they can trade without any interference of the middlemen.
  • Stablecoins- It is another form of DeFi. They peg crypto-currencies to non-crypto currencies such as the U.S. dollar so that they can keep the prices under control. They aim to bring stability in the market.
  • Lending Platforms- they are the popular form of DeFi helping to connect borrowers to lenders. Under this users can make money off of interest. They follow a compound set of interest rates which is to say that higher the demand to borrow the higher will be the interest rates.

  • Since the dawn of human civilization finances have been around in one form or the other. Crypto currencies are just the latest avatar of it. In recent times we can see every financial service that we use in today’s fiat system being rebuilt for the crypto ecosystem. As it is now one of the fastest growing sectors in crypto interface.

    What has arisen is a huge range of movement for example toward one side, there are open funds that enable people all throughout the planet in drawing in with new and renovated monetary frameworks. What's more, on the other hand, decentralized money arrangements are changing the methodology of customary establishments by bringing decentralized arrangements into play. All things considered, decentralized money projects currently range in large numbers, and we're seeing the rise of an entirely different, worldwide foundation for monetary movement.


DeFi and the way forward



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