In today’s world, all financial services are centralized. Financial institutions such as banks, insurance companies, stock markets, and stock exchanges always have someone in charge, whether it be a company or an individual that offers or regulates these services. Such is the financial system we have today: all services rely on a central authority.
However, a centralized financial system has its risks — many are prone to mismanagement, fraud, and corruption. With that being said, people wanted to come up with a more secure and safe financial system, and this is how decentralized finance (DeFi) started.
DeFi has been one of the most significant and successful waves in the crypto industry. With the technology created to replicate old financial institutions with zero intermediaries, it is now used to generate passive income through loans, borrowings, and equity investments.
In addition, DeFi is a sector focused on providing decentralized financial services created by developers that anyone can access. It lets users cut out the middleman and make financial transactions directly.
Since 2020, DeFi has been gaining popularity as an alternative to centralized financial systems, as the former is run by groups of individuals through decentralized organizations and gives users full control over their funds.
What Is DeFi?
As opposed to traditional financial services provided by banks or other traditional financial institutions, DeFi refers to decentralized financial services provided on blockchains. The term DeFi relates to a movement that aims to create an open source, permissionless, and transparent financing ecosystem.
It DeFi allows people to use blockchain technology rather than traditional financial services such as banks, stock markets, or insurance companies. DeFi services are often quicker, cheaper, and simpler, and new advantages and services are always being added. With the use of cryptocurrency, DeFi provides the same services that traditional banks offer. Users may lend, borrow, trade assets, earn interest, or even buy insurance.
The primary advantage of DeFi is the ease of access to financial services, especially for those who are isolated from traditional financial services. Included in some of the newest decentralized crypto exchanges is DOMINO. It allows users to swap cryptocurrencies conveniently, in a faster and more secure manner.
How Does DeFi Work?
Blockchain technology secures DeFi’s transactions, which are performed directly between participants rather than by traditional financial institutions. Smart contracts allow participants of the DeFi ecosystem to transact directly.
Most DeFi products don’t take custody of your funds, allowing you to remain in control of your assets. You can be able to control your assets using a secure digital wallet, and you can initiate transactions through smart contracts.
For instance, when you want to swap tokens using the newest decentralized exchange — DOMINO DEX, trades can be executed directly on decentralized exchanges using smart contracts without the need for an intermediary. Processing your transactions with DOMINO DEX will be done in a seamless and secure way. After a smart contract is set up, it can’t be changed. Therefore, funds can’t be re-routed to a different account.
Use Cases for DeFi
DeFi is being used in a variety of verticals. Listed here are some of DeFi’s top use cases.
- Borrowing and Lending
The most traditional functions enabled by DeFi are peer-to-peer (P2P) borrowing and lending services. These enable users to take a loan without the need for application reviews or bank accounts. Those who own substantial amounts of cryptocurrency but want liquidity in other currencies can borrow money by using their crypto holdings as collateral. In some DeFi apps, the borrower does not need to find a lender, since the smart contract acts as the lender itself. This financial process of lending and borrowing makes it easier and time-saving.
2. Stablecoins
If users are looking to build reliable financial services, they will definitely need a more stable currency to operate within the system. This is where stablecoin comes in. Stablecoins, due to their low volatility, are considered suitable for making ordinary purchases. The value of stablecoins is pegged to that of a real asset, usually a major currency like the US dollar.
The purpose of stablecoin in a DeFi system is to keep users’ money invested on a crypto exchange without paying high fees to cash out. Also, it does not use a currency that requires some sort of central authority.
Stablecoins are cryptocurrencies designed to provide stability. As a store of value and exchange medium, stable currencies are more useful.
3. Decentralized Exchange (DEX)
DEXs allow users to buy, sell, or trade cryptocurrencies directly from their wallets by interacting with smart contracts. Like DAI, they are also based on the Ethereum platform, which means they operate without central authority. By using smart contracts, DEXs perform the functions of centralized exchanges, offering counterparties pricing at or close to current market rates.
DEX allows users to have full control of their respective cryptocurrency holdings rather than depositing them in a wallet held by a centralized exchange that may be vulnerable to hacking.
A prime example of a decentralized exchange is DOMINO DEX. This newest platform will give its users the convenience to buy, sell, and swap tokens. With DOMINO DEX, there is no exchange operator, no sign-ups, no identity verification, and no withdrawal fees.
Decentralized Finance vs. Centralized Finance
Both DeFi and Centralized Finance (CeFi) provide financial services for people with cryptocurrency. Even though they share some similarities, they operate with and on different protocols. DeFi users trust technology and CeFi users trust the company.
CeFi operates its services in a centralized platform, controlled by government institutions and intermediaries. CeFi users must share their personal information, which may be vulnerable to security breaches. On the other hand, DeFi does not require users to give their personal data. All they have to do is to connect their digital wallets. When it comes to transaction processing, clearing and settling of transactions can take days to proceed in CeFi. Meanwhile, in decentralized finance, transactions are completed in near real-time.
Despite the fact that both platforms are run by recognized organizations that serve as counterparties to their customers, Decentralized Finance has been able to handle funds more securely. Allowing millions of people who do not have access to traditional financial systems to be managers of their own finances and transact everywhere and anywhere they go.
To sum it all up, decentralized finance seems to be one of the most promising use cases of blockchain today. There is no doubt DeFi has already reached its early adopter stage as this system can benefit a huge portion of the population that currently suffers from financial discrimination, high fees, and inefficiencies in managing their funds.
With the newest decentralized exchange — DOMINO DEX, users are able to buy, sell, and swap tokens in a safe and secure manner. With its high level of accessibility, transactions occur without any geographic restrictions. Users will definitely be able to enjoy its service as it only requires low fees but will enjoy many high-interest rates than those paid by any traditional financial institution.
You may find this interesting if you’re learning the basics of decentralized finance or looking into crypto-currencies and getting your assets out of (CeFi) banks, fund managers, etc.). Decentralized finance aims to build financial services independent of traditional financial institutions. In this way, the financial system could become more open, and precedents for censorship, financial surveillance, and discrimination could be prevented.
