Everything you need to know about Decentralized Finance
Blockchain has been advancing at a more excellent pace than before. Asset Tokenization, Smart Contracts, DApps have taken over the tech finance industry by storm. In this league of innovations comes Defi, an abbreviated term for Decentralized Finance.
Well, Defi has become increasingly important within the crypto market. Its market share has doubled since 2020 and is continuing over 2021 too where it grew by almost 100 million USD between April and March.
I have been talking for a while about Decentralised Finance. You might have been wondering what Defi is. Let me brief you.
What is Decentralized Finance?
It is an ecosystem of financial applications and protocols built on blockchain technology that can be easily programmed. In a broader sense, it is a shift from traditional centralized finance systems to decentralized technologies. It uses smart contracts to process the transactions and the agreement of the deal. If you need to read more about smart contracts, just check out this blog on how smart contracts unveil the new era of financial inclusion.
The decentralized finance ecosystem has expanded its reach from typical lending and borrowing platforms to stable coins and tokenized BTC. It is the most active sector within the blockchain space that has been creating a buzz in the market with a wide range of use cases for individuals, developers, and institutions.
Let’s look at why Defi is gaining so much popularity across the globe.
Benefits of Decentralized Finance
Defi has leveraged the critical principles of blockchain technology to enhance financial security and transparency. This has further unlocked liquidity and growth opportunities to support an integrated economic system.
Programmability:
Smart contracts used in Defi are highly programmable entities that define rules and penalties around an agreement and automatically enforce those obligations. They even help enable the creation of new financial instruments and digital assets.
Immutability:
The blockchain’s decentralized architecture doesn’t allow data to have tampered with in any form. Whatever data stored in the smart contract can’t be altered, increasing security and leveraging the audit process.
Interoperability:
The composable software stack in blockchain allows the Defi protocols to be easily integrated within the applications. Thus, the developers have the flexibility to build on top of the existing protocols, easily customize the interfaces, and seamlessly integrate third-party applications. Hence, they are sometimes termed as “money legos.”
Transparent:
Every transaction processed on the blockchain is broadcasted to and verified by the other users on the network. The transparency around the transactions allows for quality data analysis and proper network activities available to each user. Furthermore, the Defi protocols are built with open-source code that can be easily viewed, edited, read, and built upon further.
No Intermediaries:
Defi is decentralized, meaning it doesn’t require any access permissions. Therefore, anybody with a crypto wallet, internet connection, and minimum fund requirement can access Defi applications built on the XDC network.
Self Custody:
Defi market participants have control of their data and can keep custody of their assets themselves. They use Web3 wallets like Xinpay to interact with permissionless financial applications and protocols.
The decentralized finance protocols have unleashed a new era of economic activity and different opportunities for users worldwide. Let’s have a glimpse of some use cases that prove that Defi is much more than the emerging ecosystem of projects. It’s a comprehensive effort used to build a parallel financial system on the blockchain that is profoundly more accessible, resilient, and transparent.
Where Defi is used?
Asset Management
Since Defi protocols allow the users to be the custodian of their crypto funds, different crypto wallets can be used securely for interaction with decentralized applications. One can easily buy, sell and transfer crypto or can even earn interest on your digital assets. It is like owning your data. For instance, Metamask stores users’ seed phrases, passcodes, and private keys locally on your device in an encrypted format such that they can only have access to their accounts and data.
Compliance and Regulations
In Defi space, the blockchain’s decentralized architecture allows the compliance analysis around the participating addresses instead of participant identity. This eventually helps in accessing the risk in real-time and protecting against fraud and financial crimes. While in traditional systems, the compliance for AML (anti-money laundering) and CFT(counterfeiting finance of terrorism) depends on the KYC( know your customer) process.
Development and Infrastructure
The Defi protocols work on the core principle of composability, which means that different components of a system can seamlessly connect and operate with each other. This has helped Defi applications develop a network effect in which the community continues to build on what others have created. In addition, with multiple smart contract libraries, API suites, and various security tools, blockchain developers and teams can develop and launch Defi protocols with full-stack tools and security measures as required.
Signing Off:
Since the launch of Decentralized Finance, it has been turning the tables for many businesses and is currently disrupting this niche with innovations. While we wait for the new arrivals to hit the markets, it is futuristic for all of us.
Further Readings
https://techbullion.com/xinfin-integrates-decentralized-finance-defi-applications/
https://dzone.com/articles/xinfin-remix-develop-smart-contracts-for-the-xinfi
