What is Decentralized Finance (DeFi)?
The term Decentralized Finance or short form of DeFi denotes a financial system that helps to operate economic crisis without any intermediates or traditional system or centralized way. We used the financial system with the help of the bank and other financial institutions such as global exchange, but when comes to the DeFi, it creates an own functional system of its own.
How do DeFi works?
Several open-source protocols are being developed beside public blockchains, and form a framework for decentralized finance to operate on. Two main components allow a finance system to work; it needs an infrastructure to operate on, and a currency to operate with. In a centralized system, banks and financial institutions act as that infrastructure, while fiat money, like the US dollar, acts as currency. Decentralized finance must replace these components to offer a full range of financial services.
Elements of DeFi Platform:
1) Infrastructure – To write an effective decentralized program, Ethereum is the only platform to perform. Through Ethereum, we’re capable to build smart contracts, the automated code that assists to manage financial services. Through smart contracts, you can secure a set of regulations for how a financial service will work, and expand those rules to Ethereum. Once a smart contract has been deployed, it cannot be modified.
Users can build decentralized apps on Ethereum to establish any financial service, and allow smart contracts to manage those services autonomously.
2) Currency – If you want to create a highly reliable, decentralized finance system, you need a stable currency. Bitcoin is not cooperative with the Ethereum platform, and Ether – Ethereum’s programmable cryptocurrency is highly resilient. A stablecoin is a kind of cryptocurrency that matches its value with a fiat currency. DAI is a decentralized stable coin that’s pegged against the US dollar. Because it stabilized decentralization, DAI is the perfect currency for decentralized finance.
3) Decentralized Financial Services – The advantages of a decentralized finance system extent exceeding online payments. Money transfer is just one viewpoint of the traditionally centralized financial system, but decentralized finance looks to redeem every aspect, containing exchanges, loans, insurance, and saving plans.
Smart contracts on Ethereum are what provide these decentralized services to enduring, and what allows them to operate equitably and securely.
4) Decentralized Borrowing & Lending – Compound is an Ethereum-powered app that promotes decentralized, peer-to-peer borrowing and lending. Compound automatically relates lenders with borrowers, and autonomously regulates loans using smart contracts. This has pointed to a rise in the reputation of what is known as ‘yield farming’, as anyone can entrust their crypto assets and gain interest in the manner.
5) Decentralized Exchange – The decentralized exchange (DEX) is the process to buy, sell, and trade cryptocurrencies on the Ethereum platform in a decentralized way. This exchange operates without any exchange operator, ID or verification, signups, and fees, and withdraw funds. These Trades are achieved autonomously, with the terms and methods guided by smart contracts.
6) Decentralized Insurance – Smart contracts play a vital role in the decentralized finance system, which makes peer-to-peer, decentralized insurance possible too. In this decentralized finance system, user can connect with anyone across the world who are ready to protect your assets, and on the other end, you can insure other people’s assets at a reward, without ever having to go through an insurance company or agent.
Various examples of DeFi based DEX projects are,
1) Compound (lending)
2) Uniswap (swap Exchange)
3) Pancakeswap (Swap Exchange)
4) Maker (Stablecoin, DAI)
5) Synthetix (Decentralized Synthetix assets)
Summing Up:
DeFi – Decentralized Finance is the top-most Business model which is a highly securable easier way to earn capital and growth for startup people. If you have an idea to start your own business with the help of DeFi, Then hire the DeFi Development service providers who will give you the right solutions and guide you to reach your destination.
