If you are a cryptocurrency enthusiast, you have probably heard about the word DeFi at least once. The most basic definition of DeFi is decentralized finance, and it’s the idea that crypto businesses and platforms can simply recreate the traditional financial instruments.
The argument for decentralization has become extremely strong in the past few years. The recent pandemic affecting the entire world has made many investors realize the weakness of fiat currencies and centralized services, especially when it comes to financing. As DeFi stands for the alternative of traditional financial services, it is getting more and more attention as a solution.
Before DeFi, the most popular decentralized product in the past was a DEX (Decentralized Exchange). Many have tried to build a DEX good enough to compete with existing centralized exchanges, but most have failed. The biggest issue with a DEX is the lack of speed when it comes to trading as users send their coins through blockchain, which may take many minutes or more.
However, the recent DeFi boom was not thanks to decentralized exchanges but rather DApps and lending platforms. DeFi is heavily reliant on decentralized applications and has been thriving through numerous lending platforms.
Compound (COMP) has been one of the most famous examples after its direct listing on Coinbase and FTX, hitting almost $1 billion in market capitalization just days after it started trading. Compound is a money market protocol that allows users to earn interest and borrow assets against collateral. The total value locked inside it has grown significantly.
Key Components of DeFi
We already have hundreds of DeFi apps and platforms, and the number of new ones continues increasing exponentially. The main component and benefit of DeFi are that applications are open-source, meaning that anyone can review the code at any time. It implies an extra layer of security, thanks to transparency, which provides users with more confidence in the project.
Another critical point of DeFi products is their availability. Anyone in the world can use any DeFi application or platform and will not face the traditional entry barriers that we have in the current financial sector. For instance, according to the 2017 FDIC National Survey, more than 25% of US households are unbanked or underbanked. That’s a massive number considering it is not the case only in the United States. It indicates that many people in the world cannot meet the requirements of banks and centralized financial organizations, limiting their use of financial services. Many DeFi projects are willing to let everyone use financial services without asking for any requirements.
Furthermore, DeFi platforms and applications are permissionless and interoperable, allowing even more developers to enter the industry while remaining flexible and with huge potential. Although the number of DeFi platforms has been growing exponentially, there are still plenty of use cases not explored.
Conclusion
If you are interested in the cryptocurrency and blockchain industry, it will be a great choice to pay attention to the adoption and growth of anything related to Decentralized Finance. There have been plenty of projects and platforms coming up with amazing innovations and useful products that are willing to innovate the current centralized financial structure. The DeFi industry is here to stay and will most likely revolutionize the world.
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