What Is DeFi?
DeFi is short for”decentralized finance,” an umbrella term for many different financial programs in cryptocurrency or blockchain
geared toward interrupting financial intermediaries.
DeFi draws inspiration from blockchain, the technologies behind the digital money bitcoin, which allows several entities to hold a
replica of a history of trades, meaning it isn’t controlled by a single, centralized source. That’s important because centralized
systems and human gatekeepers can limit the speed and sophistication of trades while offering users less direct control over their
cash. DeFi is distinct since it expands the usage of blockchain from easy worth transfer to more complex financial use cases.
Bitcoin and a lot of other digital-native assets stand out from legacy digital payment methods, such as those run by Visa and
PayPal, they also remove all middlemen from transactions. When you pay with a credit card for coffee at a cafe, a bank stays
between you and the company, with control over the transaction, keeping the authority to stop or pause it and record it in its
private ledger. With bitcoin, those institutions are cut out of the picture.
Direct purchases are not the only kind of trade or contract controlled by big companies; financial applications such as loans,
insurance, crowdfunding, derivatives, gambling and more are also within their control. Cutting out middlemen from all kinds of
trades is one of the primary advantages of DeFi.
Before it was commonly known as property fund, the idea of DeFi was frequently called”open finance”
Ethereum applications
Most programs that call themselves”DeFi” are built on the top of Ethereum, the planet’s second-largest cryptocurrency platform,
which sets itself aside from the Bitcoin platform since it’s easier to use to build different types of decentralized software
beyond simple transactions. These more complicated financial use cases were highlighted by Ethereum founder Vitalik Buterin back
in 2013 from the original Ethereum white paper.
That’s because of Ethereum’s platform for smart contracts — that automatically execute trades if certain conditions are met —
offers much more flexibility.
Such rules could be written in a wise contract.
Ethereum 2.0, a coming upgrade to Ethereum’s underlying system, could provide these apps a boost by stripping away at Ethereum’s
scalability issues.
The most Well-known types of DeFi applications include:
Decentralized trades (DEXs): Online exchanges assist users exchange currencies for other currencies, whether U.S. bucks for
bitcoin or ether for DAI. DEXs are a hot kind of exchange, which links users directly so they could trade cryptocurrencies with
another without trusting an intermediary with their cash.
Lending platforms: These programs use smart contracts to substitute intermediaries such as banks that handle lending from the
center.
“Wrapped” bitcoins (WBTC): A way of sending bitcoin to the Ethereum network so the bitcoin may be used directly in Ethereum’s DeFi
system. WBTCs make it possible for users to make interest on the bitcoin they lend out via the decentralized lending platforms
described above.
Prediction markets: market for gambling on the results of future events, such as elections. The objective of DeFi versions of
prediction markets would be to offer the exact same functionality but without intermediaries.
Besides these programs, new DeFi concepts have sprung up around these:
Yield farming: For educated traders that are eager to take on risk, there’s yield farming, where users scan through various DeFi
tokens in search of opportunities for larger returns.
Liquidity mining: When DeFi software lure users for their platform by providing them free tokens. This has become the buzziest
form of return farming however.
