Decentralized finance (DeFi) is a term used to describe the rapidly evolving ecosystem of blockchain as it relates to modern finance. A collection of protocols, platforms and apps are allowing public users to create, store and transfer digital assets in an autonomous way.
There are no intermediaries or central authorities in DeFi infrastructures.
The main DeFi players are lenders, borrowers, fund managers and code developers. DeFi hosts a range of innovative services to enable lending and borrowing. Decentralized financing, smart contracts and native tokens make finance more accessible, transparent and resilient.
In this article, we discover what decentralized finance is, its services and the players involved.
What Is DeFi?
Do You Know What DeFi Is?
Decentralized finance is rapidly evolving and challenges the existence of traditional banks. It’s a financial system based on blockchain, which allows users to create, store and transfer financial assets without going through a central authority.
The decentralized finance (DeFi) industry is the central component driving the potential of decentralized money forward. It allows us to access traditional financial services, including lending, borrowing, currency exchanges and investments in a transparent, public ledger.
Smart contracts, which are agreements executed on a blockchain, ensure the status of transactions and the transparency of financial terms. DeFi is also a high-earning industry where normal people can lend assets at higher rates than what financial institutions usually offer.
Stable tokens, which are crypto coins tied to other financial currencies, provide even more stability for investors who want to avoid the volatility of typical crypto. At the same time, DeFi empowers us by maintaining our control of personal assets, for there’s no third party involved.
Binance
- Low fees
- One of the largest crypto exchanges
- Fee discount for using native BNB
Binance
You can access your assets in DeFi at any time—without seeking an authorization from a financial institution. This makes DeFi more resilient to economic disruption and risks of fraud.
However, this industry is still an evolving field. Risks do exist. You must be aware of the risks of theft, computer hacks and the volatility associated with the investment assets of blockchain.
The Benefits and Risks of Decentralized Finance–DeFi
A Better Look at What Decentralized Finance Is
The Advantages of DeFi:
- Earning opportunities: You can lend digital assets at higher rates than the cut you’ll get from traditional financial institutions. In DeFi, lenders, like you, can earn interest by lending cryptocurrencies to borrowers on various-lending platforms.
- Resilience: DeFi is resilient to economic disruption and fraud because there’s no single point of authority to infiltrate or corrupt.
- Asset control: Without a trusted intermediary, decentralized finance (DeFi) users can store cryptocurrencies in a personal wallet and transfer them as they wish.
The Risks of DeFi:
- The complexity of getting started: Blockchain technology and DeFi protocols are still relatively new and can be difficult for novices to understand at first.
- Security risks: Even if platforms are increasingly secure, the risks of theft, smart-contract bugs and volatility are still high.
- Volatility: Digital assets are often very volatile, and the risks of significant losses for investors can come from severe changes in market values.
Regulatory risks: Even if more and more governments are starting to focus on the subject, DeFi still escapes controlled regulations overall.
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Services Offered In DeFi
The True Definition of Decentralized Finance
The DeFi ecosystem has grown enormously in recent years, reaching over 65-billion USD in total value. You can also stake into blockchain protocols and apps offering decentralized services.
Here’s a look at the decentral services you have access to in this growing sector:
Decentralized exchanges: You can exchange digital assets directly with others but without the need for a centralized intermediary in the way.
Lending and borrowing: Interest rates may vary depending on demand and supply, but collateralized loans now allow digital assets to be borrowed against other digital assets.
Stablecoins: These crypto assets are designed to maintain a stable exchange rate against a fiat currency such as the US dollar.
Automated trading: Automated trading strategies are programmed on decentral exchanges.
Flash lending: This is the borrowing of an asset for a short period of time.
Cross-chain lending: Cross chains enable borrowing or lending between different blockchains.
Yield farming: In farming, you obtain high returns on crypto-assets by providing liquidity to decentralized-finance protocols.
Margin and leverage: Investors borrow digital assets using other digital assets as collateral to increase their leverage on trades, which provides them with more capital than they hold.
The Key Entities of Modern Finance
A Clearer Definition of Decentralized Finance
There are a number of entities enabling DeFi today. They range from lending and borrowing platforms to value stabilization protocols and decentralized financing with bounty systems. The best-known DeFi projects include Ethereum, MakerDAO, Compound and Uniswap.
These agents play a key role in creating an accessible-financial ecosystem, allowing users to regain control of their assets and reducing dependence on traditional institutions. The technological advances in the areas of blockchain and smart contracts will continue to propel the evolution of DeFi, providing new opportunities for users and developers alike.
| Categories | Actors |
|---|---|
| Blockchains | Ethereum |
| Avalanche | |
| Solana | |
| Binance Smart Chain | |
| Polygon (Matic) | |
| TRON | |
| DeFi Protocols | MakerDAO |
| Compound | |
| Aave | |
| Curve | |
| Uniswap | |
| Yearn Finance | |
| SushiSwap | |
| Balancer | |
| Oracles | Band Protocol |
| Chainlink | |
| Arweave | |
| Ocean Protocol | |
| The Graph |
Blockchain and decentralization
Uncovering Definitions of Decentralized Finance
The transition to efficient, inclusive and affordable finance isn’t instant. This transformation requires in-depth reflection on the current shortcomings of the traditional financial systems.
Blockchain technology provides a solution to most of these challenges by offering a decentralized architecture that eliminates the need for mutual trust and enhances user autonomy. Advanced consensus protocols combined with the use of smart contracts enable automation and 24/7 access to secure, financial services.
Coinbase
- Regulated exchange
- An easy-to-use platform
- Free crypto training offered
Coinbase
Today, many blockchains offer a thriving DeFi ecosystem. We can notably cite Ethereum, Avalanche, Polygon, TRON, Solana, Fantom and Binance Smart Chain in the mix.
Digital Applications and Protocols
Although blockchain offers significant benefits in terms of security and efficiency, there are some challenges when it comes to user experience. DeFi protocols are complex decentralized applications (dapps) that aim to democratize financial services. These protocols are powered by smart contracts, which are automated programs that manage user expectations.
Some of the leading DeFi protocols in our current ecosystem include:
MakerDAO
MakerDAO is a DeFi protocol, built on Ethereum, that enables the creation of stablecoins collateralized by decentralized assets. The stablecoin of MakerDAO is DAI, which is pegged to the value of the USD at 1:1. The protocol uses a technique called “debt governance” which empowers users to generate DAI by depositing assets such as ETH as their collateral.
MakerDAO is considered a key player in the DeFi ecosystem due to its ability to provide stable and convenient cryptocurrencies for the public.
Compound
Compound is a decentralized lending and borrowing protocol, which is also built atop the Ethereum blockchain. Compound users earn interest on the assets they hold within this architecture, and these assets fund the loans that other users request. Compound uses smart contracts to generate cTokens, which represent a portion of assets deposited as collateral.
Users can use cTokens to access other DeFi protocols or to earn interest. Compound is among the largest decentralized finance platforms due to the liquidity it offers investors.
Here’s a better look at the leading agencies in autonomy and finances:
Aave
Through its role as an international bank, this lending and borrowing protocol enables users to earn interest on the assets they put on hold to offer loans to other users. The interest rate for each asset is determined by market supply and demand, which can fluctuate in real time. It’s also possible for you to change your collateral asset for another without interrupting your loans.
Aave is fully decentralized and managed by a governance community that votes on policies and site-wide settings.
Curve
Curve is a DeFi protocol based on the Ethereum blockchain and aims to create a liquid market for stablecoins and those using them. Curved uses a system of liquidity, via pools, to allow users to trade between different stablecoins but at stable-exchange rates. The protocol uses an automated market maker (AMM) architecture to ensure the liquidity and stability of exchange.
It has become a key player in DeFi because it provides liquidity for stablecoins.
Uniswap
Uniswap is a DeFi protocol that decentralizes financing exchanges. It uses the automated market maker system so that users can trade assets in a decentral way—without the need for a trusted-third party. It allows you to deposit assets to create or participate in liquidity pools and to exchange assets at exchange rates automatically calculated by its protocol.
Yearn Finance
Yearn Finance (YFI) is a DeFi protocol based on the Ethereum blockchain, which aims to improve investment returns by providing high-yielding products and automated investment strategies. It uses smart contracts to automate investment strategies by automatically moving your assets to protocols that are offering the highest interest rates at any moment.
Sushi Swap
SushiSwap is a DeFi protocol that’s also built on the Ethereum blockchain. The platform provides a decentralized protocol for crypto exchanges. It’s inspired by Uniswap and uses an automated market maker architecture to allow users to trade assets with autonomy.
Via SushiSwap, you can deposit assets to create or join a liquidity pool. You can also exchange assets at rates calculated by the protocol, providing governance for users who hold SUSHI tokens, which is the native token of the protocol.
Balancer
Balancer is a decentralized-financing marketplace for crypto exchanges and multi-asset liquidity pools. It’s also built atop the Ethereum blockchain.
It uses automated market maker protocols to allow users to trade assets in a decentral way—without the need for a trusted third party. Balancer is fully decentralized and managed by a governance community that votes on its policy and protocol changes.
The Oracles of DeFi Ecosystems
Decentralized finance relies on secure, robust infrastructures to ensure its proper functioning. This is where oracles come into play with players such as Chainlink, Ocean Protocol, The Graph, Arweave and Band Protocol now being absolutely essential in this architecture.
Oracles provide non-blockchain data to decentralized applications. They enable smart contracts to access real-world “off-chain” data, still in a decentralized and intermediary-free manner, that go into setting asset prices or exchange rates. The data can be used for decentralized exchanges (DEXs) to ensure transparency for its public users.
Oracles are, therefore, considered key players in the DeFi ecosystem, enabling this financial ecosystem to operate autonomously and to stay decentralized.
Conclusion
The Full Breadth of What Decentralized Finance Is
Decentralized finance is revolutionizing the financial industry by offering alternative financial services that are decentralized, transparent and accessible to all. DeFi protocols such as MakerDAO, Aave and Uniswap are key players in this rapidly developing financial system.
The future of DeFi is promising. Users can expect increased adoption and more innovative services. New financial products are emerging to empower decentralized lending, insurance tokens, decentralized-financing options and financial forecasts.
DeFi hosts a number of opportunities for those investing to maximize returns or diversify their portfolios. Just keep in mind the risks of using such protocols, for they are still in development.
