An Overview of Decentralized Finance (DeFi)
A decentralized financial system based on blockchains and smart contracts enhances financial efficiency and transparency, eliminating existing problems. This is why many people are starting to favor decentralized finance (DeFi) over centralized finance in the world of fintech due to its anonymity.
As a result of this, third-party platforms are less needed, especially for monitoring the performance of agreements. In addition to improving trust, smart contracts could also reduce operational, fraud, and legal risk costs.
In particular, DeFi makes financial services more accessible to those who lack access to traditional financial services. The number of DeFi marketplaces has grown rapidly since DeFi gained popularity, as well as the size of the market and adoption rates.
Among these marketplaces is the newest decentralized crypto exchange — DOMINO DEX. The service makes it convenient for users to exchange cryptocurrencies quickly and securely. Processing your transactions with DOMINO DEX can be done seamlessly and securely.
How DeFi Is Better Than CeFi
To increase cryptocurrency and NFTs expansion worldwide, decentralized finance (DeFi) and centralized finance (CeFi) have been introduced to the crypto and NFT space.
Both CeFi and DeFi share many similarities in offering financial services to cryptocurrency users. However, although they have similarities, they also use different protocols and operate differently. CeFi users trust the company, while DeFi users trust the technology.
Apart from this, here are a few factors that differentiate DeFi from CeFi:
Transparency
Open-source and publicly verifiable codes are available from DeFi. The entire transaction process can be observed by the user; therefore, DeFi is transparent. CeFi, on the other hand, involves a middleman and the process cannot be observed.
Anonymity
Anonymous individuals worldwide create and manage DeFi projects. To record transactions, DeFi uses distributed ledger technology. On the other hand, CeFi processes and transactions are less anonymous.
Custody
Assets in DeFi are directly controlled by the owner. Meanwhile, CeFi — which also stores crypto-assets — is controlled by central exchanges.
Privacy
CeFi stores users’ 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.
Transaction Processing
When it comes to transaction processing, clearing and settling of transactions can take days to proceed in CeFi. Meanwhile, DeFi transactions are completed in near real-time.
Precursors for DeFi Evolution
Blockchain
With DeFi, financial products are made available on a decentralized, public blockchain network. Blockchain consists of a list of records in “blocks” connected using cryptography. Cryptographic hashes of previous blocks, timestamps, and transaction data are contained in each block. For the block’s hash, a timestamp is used to prove that the transaction data existed at the time the block was published. The blocks form a chain because each contains information about previous blocks. Subsequent blocks reinforce the chain.
Due to this, it is comparatively harder to change blockchains, since the recorded information cannot be altered retroactively without affecting subsequent blocks
Cryptocurrencies
In many regards, Bitcoin was the foundation for DeFi, as it introduced a decentralized manner of sending payments around the world with accessibility.
Cryptocurrencies are characterized by the fact that they are not issued by central authorities. A number of alternative coins (altcoins) are available to Bitcoin, including Solana, Litecoin, and Cardano. By being pegged to the US dollar or a commodity such as gold, stablecoins seek to mitigate or offset the inherent volatility of many cryptocurrencies. DeFi includes cryptocurrencies as a core component of a new type of financing that does not require a central financial intermediary.
Smart Contracts
A major component of DeFi is the use of public blockchains like Ethereum, which facilitate smart contracts. The term “smart contract” refers to an automated contract, which is a code that is self-executing in accordance with certain conditions and is immutable once implemented.
By automating the execution of agreements, smart contracts enable all parties to verify the outcome as fast as possible without a third party or time delay. More or less, a smart contract acts like a stamp to secure data on a blockchain.
Initial Coin Offerings (ICOs)
ICOs have played a significant role in the development of DeFi, as many have launched new blockchain projects that have had a profound impact on Ethereum and the wider crypto community. However, ICOs are not as popular as they were before due to their vulnerability to abuse.
How DeFi Evolved
There were multiple stages of evolution for the DeFi ecosystem, with different projects identifying market inefficiencies and making significant changes to the industry. We saw platforms such as Compound showcase a new application of blockchain and cryptocurrency for finance, setting the stage for DeFi’s birth and evolution.
Decentralized exchanges powered by automated market makers or AMM were the next significant change to DeFi that drove its growth. A decentralized exchange like Uniswap helped balance capital efficiency with decentralization. Meanwhile, DOMINO DEX is a next-generation decentralized exchange where traders can trade tokens and coins at a comparatively lower fee.
Due to the launch of governance tokens, most DeFi protocols opened up many opportunities for yield farming and liquidity mining. The estimated annual returns are astounding.
Stablecoins are another significant factor that helped DeFi establish its popularity. In addition to being used for payments and as a store of value, stablecoins are also referred to as “decentralized money.” By adding to the existing financial products in the DeFi space, stablecoins are helping to create more products.
With the introduction of perpetual futures, marketplaces, synthetic assets, and reserve currency protocols, DeFi has undergone many changes.
Closing Thoughts
Decentralized finance has developed exponentially in recent years. The decentralization of the financial world helped in improving the business and trading of people in the crypto space, and much more. As a result, many people are preferring cryptocurrencies due to their revolutionary blockchain technology.
DeFi is making everyone the boss of their own work, and leader of their particular field. Soon, we won’t need financial intermediaries as much as before.
The DeFi industry has great potential and will continue to grow rapidly as it operates on a P2P basis, hence making it very transparent and secure. Especially in the world of digital currencies, borderless payment transactions are preferred to be done with the help of DeFi.
