Any staunch enthusiast of the crypto space will most probably know what Defi is right now giving all the activity and hype that's been revolving around the sector lately.
This article is for anyone who's not really familiar with the concept of Defi just like I was a few days ago and would love to grasp some details about it.
Like in the case of ICO's and IEO's, can we say that Defi is a trend that will pass once the hype dies down? Before we answer that question, first let's talk about what Defi is?
What is Defi?
The word Defi is actually an acronym for decentralized finance which is an initiative put together by blockchain practitioners aiming to create a new financial system in the world.
The system being proposed or should I say being built aims to be devoid of traditional third parties like banks with decentralization at the core of it all.
Defi as a whole concept relies a lot on smart contracts on the blockchain and cryptography.
If you don't know what a smart contract is, here's a simple explanation.
A smart contract is simply a pice of code that does a specific thing on a blockchain based on certain conditions, priviledges and other forms of facilitation.
Smart contracts can be used to do just about any thing on any blockchain, such as creating tokens on the chain, automating transactions, storing data and so on.
A classic example of a popular blockchain that smart contract friendly is Ethereum blockchain. Apart form Ether, the native cryptocurrency of the Ethereum blockchain many other numerous tokens are built on Ethereum infrastructure by virtue of smart contracts.
It comes as no surprise really to see that majority of the Defi platforms and protocols that we have today are built on the Ethereum blockchain given the robustness of it Solidity, the programming language used to build Ethereum smart contracts.
Some applications and potential utilities of Defi
Defi can actually be used to facilitate a number of financial concepts and operations such as
Lending and Borrowing
Platforms like MakerDAO and Compound, help lenders facilitate lending of their cryptocurrency assets out to borrowers and start generating interest on their locked in assets.
The cryptocurrency assets can also be used as collateral to be used to acquire loans from the platform.
Creating stablecoins pegged to fiat
Smart contracts allows us to be able to create stablecoins backed by a fiat currency mostly the US Dollar.
That is to say, for every unit of a stablecoin mined or created an equivalent amount of the backing fiat is stored away.
Examples include USD Tether which is backed by the US Dollar.
Decentralized exchanges (DEX)
A decentralized exchange is the opposite of what a centralized exchange is.
On decentralized exchanges, there is no central authority on the exchange making all the rules and probably abusing them like on centralized exchanges.
Examples of Dex includes,
- Uniswap
- Bancor
- IDEX
There are a lot of ways in which Defi can be applied to revolutionize the previously existing financial framework, the exact list of utilities of defi is not definitely defined as it is a new field and people keep finding new ways to create innovative solutions through the concept.
Defi is certainly taking the crypto space by storm and has been generating a steadily rising momentum over the last few months, what do you think of this new approach to structuring the financial system.
Please share your opinion in the comments.