You might have heard of the term “DeFi” most often in the context of cryptocurrency and blockchain technology. The DeFi industry has seen tremendous growth over the last few years as it has been providing alternatives to financial services that are commonly offered by banks. According to DeFi Llama, the combined Total Locked Value (TVL) of all DeFi protocols increased from $600 million at the start of 2020 to $54.2 billion in September 2022 amid market turmoil. This is undoubtedly one of the reasons to learn more about the fastest growing sector in the blockchain space.
What is Decentralized Finance (DeFi)?
As overwhelming as it may sound, its goal is quite simple. DeFi, which stands for decentralized finance, is a cutting-edge financial technology that relies on smart contracts to create protocols similar to the conventional financial system in a permissionless, transparent, and open manner. This platform allows users to trade assets, lend and borrow crypto, obtain insurance, earn interest, and much more by using peer-to-peer (P2P) transactions. Imagine putting your hard-earned money in the bank and losing full authority over it. Institutions such as banks and issuance firms are called “gatekeepers” of a traditional financial system since they control the flow of money. Given that they oversee all your assets, they have total control over things like limiting your transactions or closing your account when you violate their guidelines. In a decentralized system, on the other hand, there is no such thing as a central authority or intermediaries.
How does it work?
DeFi runs on a blockchain, and its primary goal is to provide financial services while getting rid of middlemen. In this way, there’s no need for permission from governing bodies and authorities to proceed with your transactions. Remember when you needed to fill out a bunch of forms just to open a bank account? With the help of smart contracts, you only need a crypto wallet to get started. Smart contracts are digitally stored contracts found on the blockchain. The way it works is that it automatically executes transactions when the conditions of the involved parties are met. Smart contracts serve a similar function in banks where they verify if you have enough funds to be able to conduct a transaction.
What are DApps?
Decentralized applications (known as DApps) operate on a blockchain or a P2P computer network computer rather than a single computer. DApps provide many benefits, including quick access to financial services, enhanced security, lack of centralization, privacy, reduced costs, data integrity, and many more. In reality, DApps and currently available traditional applications share almost the same functionality. The only main difference is that DApps have a backend code called smart contracts, which runs on a decentralized P2P network. In addition, DApps are entirely open source. This means that you can use these applications without the need to trust any third parties.
The role of blockchain networks play a crucial role in maximizing the endless possibilities of DeFi in the creation of dApps, where DeFi can be utilized for various use cases:
- Asset Management — gives users a greater sense of ownership of their data and assets as they have complete control over them.
- Compliance and KYT — uses the know-your-transactions (KYT) method to monitor financial transactions rather than user identity. Since real-time data is available, it cannot be manipulated or changed. This mechanism prevents fraud, money laundering, and other financial-related crimes.
- Synthetic Assets — allows the creation of tokenized derivatives, giving investors exposure to the price movement of an asset without having to hold it.
- Data Analytics — appropriate analytical tools and metrics are utilized to help users develop better risk reduction strategies.
- Payment Solutions — removes the hassle of traditional payment methods and offers users a much faster, safer, and transparent transaction.
- Lending Platforms — provides a transparent and easy-to-access P2P lending and borrowing platform with fixed interest rates and minimal fees.
- Decentralized Exchanges (DEX) — facilitates the trading of cryptocurrencies and digital assets between users.
- Decentralized Autonomous Organizations (DAOs) — serve as one of the pillars of DeFi and a counterpart to centralized financial institutions that focuses on governance implementations, asset management, and fundraising.
- Gaming — With the rise of NFT gaming, playing games is no longer just a pastime. NFT games give players an opportunity to earn tokens as rewards, which they can convert into any coins using a DEX.
Equito Finance: Algorand’s Cross-Chain DEX
Equito Finance is an open source bridge protocol and AMM decentralized exchange (DEX) currently built on top of the Algorand blockchain. Founded by Paolo d’ippolito in 2019, Equito aims to become the gold standard for seamless liquidity transfer to support emerging DeFi markets on new and cutting-edge blockchains while relying on the robust architecture of Algorand technology. As a chain agnostic platform, Equito seeks to expand into ubiquitous network-to-network infrastructure. As of now, Equito offers a secure and seamless bridge to enable the cross-chain transfer of assets from the Algorand network to other major blockchains like Ethereum and vice versa within 30 seconds, making EquitoBridge the fastest bridge on the network.
Closing Thoughts
DeFi aims to create a building block toward a permissionless and borderless financial market. Investors and developers have made significant contributions to the advancement of this technology, targeting a better and far more democratic financial system. Moreover, DeFi seeks to eliminate centralized governing bodies and third parties, thereby paving the way for a seamless transition for financial services toward web3 adoption.
Don’t forget to follow us on all our social media accounts and join our vibrant community!
