Decentralized Finance explained

A complete guide to decentralized finance

Decentralized finance is a peer-to-peer financial service on a public blockchain, primarily Ethereum. A blockchain that includes a cryptocurrency essentially is a public ledger to store digital assets.

DeFi takes traditional financing and replaces the intermediaries with smart contracts.

The goal of DeFi is to create a financial market that is open, trustless and is devoid of permissions, as long as you understand how the smart contract works no one will ever be able to dupe you as the smart contract executes itself once an event is triggered. DeFi technology focuses on improving the current economic system resulting to a better User Experience and functionality for those who use the technology.

Some platforms leverages this technology to allow consumers to lend or borrow money from others , trade using crypto, insure against risks and earn interests in savings-accounts.

In simple terms in a traditional system if Alice wants to borrow $10,000, Alice must have some assets that acts like a collateral , the bank evaluates Alice’s finances to enable it to set an interest rate for your loan repayment based on the bank’s requirements.

The bank lends you money from it’s deposit pool, collects your interest payments and has the power to confiscate your collateral if you don’t pay. The same goes for stock trading and asset management.

Decentralized finance leverages on using development infrastructure to run decentralized services. Ethereum does this, a scalable blockchain developed by Vitalik Buterin and is the most used blockchain to run dAaps.

Ethereum enables users to write smart contracts which is a self-executing program that is triggered once an event is achieved, these events are normally the agreements put in place between the buyer and the seller, and it is fully automated.

Smart contracts enable users to manage their financial services in a decentralized manner against the established centralized organizations. This means the users are the ones who agree on certain rules and once the events are deployed into the blockchain network, no one has any control over them since the code is immutable.

Once users get the most suitable blockchain network or platform to write their own smart contracts, they are able to build DeFi’s systems in dAaps which are applications that runs on a distributed network.

Benefits of DeFi

• Transactions are transparent
• Transactions are real-time
• DeFi is permission-less.
• Smart contracts are immutable

Why Both Bitcoin and Ether aren’t suitable to use in Decentralized Finance

Bitcoin is decentralized though it has a minimal programmable functionality & it’s not compatible with the Ethereum network. While Ether is highly volatile to be adopted in financial services.

Stable coins are pegged to the actual value or real-world assets such as the widely used US dollar and is used to stabilize the typical lending and borrowing activities in the DeFi market and are more suitable for trading and commerce.

The Future of DeFi

Decentralized Finance has already seen phenomenal growth over the last few years. However, there are over 1.7 billion unbanked people in the World excluded from the traditional financial system who could benefit from DeFi.

Solving the Scalability Issue of DeFi

For DeFi to be scalable, the blockchain that powers it must also be scalable. I’ve used some platforms, and their transactions are painfully slow. This will remain an issue until developers resolve the scalability issue.

Use Cases

Lending and Borrowing

The whole idea behind DeFi lending is to offer crypto loans in a trustless manner without the need for any intermediaries such as banks. It also allows users to enlist their crypto coins on the platform for lending purposes. You can easily take a loan through a decentralized platform known as Peer-to-peer lending. The protocol also allows the lender to earn interests.

Summary and the future of DeFi

DeFi is a super interesting ecosystem that is full of opportunities. But, we have to remember that it is still a very early stage industry, so it’s high risk and a high reward game.