Decentralized Finance, Smart Contracts, and Blockchain
Defi, or Decentralized Finance, refers to an ecosystem of financial applications developed on Blockchain technology.
What is Defi?
The emergence of this Decentralized Application Ecosystem represents a turning point in the way finance is conceived in the modern era.
Indeed, thanks to Defi, anyone with an Internet connection can take advantage of a myriad of financial services, services that would have been inaccessible to those individuals who are geographically isolated and physically distant from traditional financial touchpoints.
The term decentralized finance refers to a movement to create a multitude of open-source, permissionless, and transparent applications and services that are accessible by anyone and without the intermediary of a central guarantor authority.
Decentralized Exchanges vs Centralized Exchanges: Understanding the Key Differences for Corporates
Everyone who takes advantage of financial services on Blockchain is effectively in possession of assets not controlled by a central authority, assets they can use by interacting with other users through decentralized applications (dapps) peer-to-peer or peer-to-contract.
What specifically are the services usable through Defi?
There are many services usable through Defi. For example:
- Lending and borrowing: these concern the ability to lend or borrow through a computer protocol without going through a trustee intermediary
- Monetary banking services: these cover the issuance of stablecoins (digital coins linked to the performance of a fiat currency), mortgages, and insurance
- Decentralized markets: decentralized exchanges (DEX) represent the most common use case currently in the world of Defi. These are platforms that allow users to trade with their digital assets, without going through a centralized entity (centralized exchange), with peer-to-peer exchanges directly between users’ wallets.
Automated market makers and smart contracts
Recently, in addition to classic DEXs, so-called “automated market makers” (AMMs) are depopulating.
Their application is similar to that of DEXs but with a very different underlying architecture: while in DEXs the exchange of digital assets takes place directly between users’ wallets, in AMMs the exchanges are “peer-to-contract,” that is, from user to digital contract.
All these applications are possible through the use of Smart Contracts, or automated computer contracts.
Decentralized Finance and Exchanges: Revolutionizing the Financial Landscape
Rather than contracts in the legal sense, Smart Contracts resemble mathematical functions of the “if/then” type, i.e., they return an output with each given input.
In order to use them, it is necessary to have a decentralized (not managed by a third party) wallet, such as Metamask.
These “digital contracts” require digital verification by users through their wallet application and payment of a fee called a “gas fee” in the jargon.
The potential of Smart Contracts and Defi is enormous, almost limitless, despite some minor technical flaws in terms of usability and flexibility. It should be kept in mind that we are talking about new generation technologies and therefore in some respects still immature. However, most likely, in the coming years ,we will see more user-friendly solutions, capable of satisfying a larger user base than today.
Decentralized Service Ecosystems: what future lies ahead?
To date, the field of Defi appears to be used by a niche of individuals that is still rather narrow at the global level, a niche composed mainly of enthusiasts and people sensitive to the issues of decentralization and financial freedom.
Yet new Blockchain-based applications are being born every day.
Moreover, the monetary value locked in Defi’s computer protocols periodically grows more and more. Suffice it to say:
- On January 1, 2020, the blocked value corresponded to about $677 M.
- On January 1, 2021, the locked value corresponded to approximately $15.8 BILLION
- As of today, the date of the writing of this article, the locked-in value corresponds to about $62.5 Billion
The image shows the growth of locked value, in dollars, on decentralized computer protocols.
Called the Future of Finance: Decentralized Finance
It is too early to claim that we are facing a revolutionary technology. There are still many technical limitations and it will be years before the decentralization process can be globalized.
However, in a few years, Defi could change the way we understand finance, making it available more usable to a mass audience.
An industry that Defi certainly is one to keep an eye on! Would you like to trade on a decentralized finance network? Trade on Venice Swap.
