“DeFi” or Decentralized Finance, refers to the spectrum of applications built on blockchain networks, with the aim to disrupt conventional financial mechanisms. In general, smart contracts is the backbone technology of these decentralized applications in order to facilitate automated enforceable actions and eliminate the need for intermediaries and centralized parties.
Many projects attempt to build blockchain-based applications and integrate smart contracts within their procedures. However, they often base their operations on centralized information feeds living outside the blockchain – known as oracles.
The term “DeFi” has been derived from Ethereum community and aims to remove any aspect of centralization implemented within such applications, by eliminating the need of oracles and enabling automated actions and governance for user activities. “DeFi” is a newly emerging industry within the blockchain ecosystem, aiming to contribute towards enhancing cost efficiency, speed and scalability.
What does the term “Decentralized” in “DeFi” stand for?
A decentralized application achieves full decentralization when no central party has any governance control over users’ activities. For example, if a hack occurs on a cryptocurrency exchange and then the exchange returns those funds to the users, both of these events indicate lack of full decentralization and a certain extent of control by a central party.
So, we got the importance of decentralization, but how does the term “Finance” combine with decentralization?
“DeFi” implies decentralizing any aspects of the finance industry including financial products and services, consequently removing the need for intermediaries. Therefore, such products and services include building decentralized environments where users can directly transact with each other in regards to:
- Asset management by gaining full control of your tokens, coins (example: Metamask)
- Remittance, Lending and Borrowing (example: AAVE)
- Prediction markets (example: Augur)
- Staking (example: TrustSwap Launchpad)
- Savings (example: PoolTogether)
- Margin Trading (example: Compound Finance)
- Trading of derivatives (example: MCDEX)
- Exchanging cryptocurrencies through decentralized exchanges (examples: UniSwap and DEX Binance)
- Integrate blockchain technology with digital identity (example: Concordium)
- Insurance (example: Nexus Mutual)
- Crowdfunding (example: WeiFund)
Most “DeFi” applications are built on Ethereum, however we are witnessing many alternative blockchain networks to emerge and compete.
Check a comprehensive list of “DeFi” applications here.
More blockchain educational material coming soon on The Crypto App blog.
