We are sure while trying to understand your beloved digital currencies, you must have stumbled upon the term DeFi. In case you are a novice to investing using electronic currencies, then you are in the right place. We believe you need to know what it means to make the procedure sail smoothly. DeFi is short for Decentralized Finance. It is an umbrella term that many use to signify ethereum and blockchain applications. And how it gears towards disrupting any financial mediators. Of course, you are not satisfied with just this. If you aren’t, then keep scrolling down to thoroughly understand it.
What is DeFi?
The answer to the question “what is DeFi” is simple. In simpler terms, it is the umbrella term for a variety of financial applications in the world of digital currency. Normally, they are applied towards disrupting financial mediators. Normally, DeFi has solely drawn inspiration from the blockchain. Now, we all know how blockchain has been the backbone of digital currency Bitcoin. It allows several entities to hold a copy of the history of transactions. So, one can say that it is not something a single and central source controls.
It is a crucial aspect of a centralized system as human gatekeepers can only limit the speed and easiness of the transaction. Moreover, it offers less direct control over the money. DeFi is a distinct element as it expands the usage of blockchain from a simple value transfer. It changes it to more of a complex financial use case.
Bitcoin and other digital-native assets stand out from other payment methods, such as that of Visa or PayPal. Because it tends to get rid of the middlemen from the method of transaction. However, when you tend to pay with a credit card for anything, the financial system operates as a middleman. They control the transaction.
Moreover, upon them lies the authority, and control to move it, stop it, pause it or continue with it. However, when it comes to Bitcoin, such middlemen are cut out. Apart from the financial applications, there are such methods as insurance, loans, betting, and other factors that they control. So, DeFi cuts out the middle transaction and that is the advantage.
The Application of DeFi on Ethereum
Although we now know it as decentralized finance, previously, the idea of DeFi came to exist as “open finance”. Most applications that we know as DeFi are built on top of Ethereum. It is World’s second-largest cryptocurrency platform that is very different from the Bitcoin one. With Ethereum, one can build other types of decentralized apps easily.
So, one can say that one can use it beyond just making simple transactions. Although one might think it to be complex, the multiple features of this provide one the freedom to channel their creativity. Ethereum creator Vitalik Buterin in 2013 highlighted these points in the original Ethereum white paper.
He claimed that ethereum has a platform that hosts smart contacts. In other words, it automatically executes transactions if the user will meet even certain conditions. So, one can see the flexibility in terms of trading. To make the procedure easier, it has a language of its own. The language is Solidity which creates and deploys such smart contracts.
So, with such a feature, dozens of DeFi applications will operate on Ethereum. Although the users are now awaiting the upgrade of Ethereum to Ethereum 2.0. So, with it, the users will easily get their hands on a medium with no scalability issues.
What are Some of The Popular Types of Defi Applications?
1. Decentralized exchanges (DEXs)
It is an online exchange that assists the users to exchange the currencies for other currencies. Whether one is using the U.S dollar for bitcoin or Ether for DAI. With the help of this, one can easily connect users directly. It will get rid of the mediators. So, one can easily trade their money without bringing in the middleman.
It is normally a cryptocurrency. One can say that it is tied to an asset that is outside of digital currency. The main aim of this coin is to stabilize the value.
3. Lending platforms
It is a platform that uses smart contracts to change the mediators. The mediators that one can change are banks that are in charge of managing the method of trading in the middle.
4. “Wrapped” bitcoins (WBTC)
It is a method that sends Bitcoin to the Ethereum network. They do it so that the users can use it directly on the DeFi system. Moreover, WBTCs allow the users to earn interest on Bitcoin they lend out via the Decentralized lending platforms.
5. Prediction markets
It is generally the market for betting on the outcome of future events. The goal of the DeFi version of the prediction market is to offer such actions without the mediators.
6. Lending Platforms
Lending markets are a popular form of DeFi. As it happens, it connects the borrowers to lenders of cryptocurrencies. One popular form of the platform is Compound. Hence, it allows users to borrow digital currencies or offer their loans.
It also provides the user the chance to make money off this, or they can earn interest for lending out their money. Normally, the interest rates for the Compound are high. And, algorithmically based as well. So, the interest rates will always go higher.
FAQ (Frequently Asked Questions)
Que: What is the right way to make money with DeFi?
Ans: You must know that the value locked up in the Ethereum project is exploding. So, you must download the ethereum-based lending apps. By doing so, the user will be able to generate passive income. Hence, loaning out their money and gaining interest from the line will increase their amount.
Que: Is DeFi safe?
Ans: There are some good projects. However, there are some bad projects as well. You have to separate the good from the bad and then invest. To know about it, you just consult your financing manager.
More and more people are now being drawn to Defi. Although it is hard to say the exact time when it will go online. We believe that it will go online soon as the user base is expanding. As the technology is new, experimental, and flexible, it will become useful.