Have you ever imagined a financial service without a bank, a broker, an intermediary, or any institution acting as a third party?
Have you ever encountered a system that communicates between two parties and carries their operations with secured privacy and absolute anonymity?
Well, now you can witness it because DeFi is introduced to the world, and it has started disrupting the entire financial ecosystem during its development phase.
DeFi, also known as “decentralized finance,” is predicted to be the future of banking and financial institutions due to its extensive alternatives to present financial products and services with reliable, fast, secure, and pseudonymous benefits.
DeFi enables almost every bank service that is used frequently, such as
- Borrowing and lending with interests
- Buying Insurance
- Getting a loan
- Trade derivatives and assets
DeFi is fast, secure, and paperless. It is a global peer-to-peer management system built on ethereum and based on revolutionary blockchain technology.
After reading this article, you will figure out:
- What is DeFi?
- What are its types?
- How does DeFi Works?
- How is it different from traditional financial services?
We will also recommend you the top 5 DeFi dapps that you must try;
Without any delay, let’s get started.
What is DeFi?
DeFi is a global financial system that performs its activity in quick and real-time without any third-party interference.
It was created to address the centralized financial system issues that are tight, manipulated, centralized, governed by third parties, interfered with by authorities, and carry the same old process from centuries ago.
It provides absolute control over your money, gives you the ultimate transparency, and displays a range of alternatives to your local banking and financial services.
DeFi is open, secured, and managed by the web community through the ethereum blockchain technology.
Today, billions of transactions have successfully been completed through the DeFi services without any errors, and the numbers are increasing day by day.
No one is authorized to block your payments, hold your money or close your accounts. DeFi gives you absolute freedom and total control of your funds and manages all your transactions.
Human error is next to impossible, as DeFi runs on codes and does not rely on human authority, which means anyone can inspect, scrutinize and verify every micro activity on the DeFi platforms.
Argentina is becoming a global example for regulating the DeFi services in their country as many companies have started to pay employee salaries in real-time.
It is a brainchild of Ethereum as the smart contracts made it possible for everyone to use, verify and validate its authenticity and transparency.
DeFi tokens and cryptocurrency are built into Ethereum and allow complete freedom to use as we want. The transactions are recorded on an ethereum public ledger that makes them public, withholding the privacy between two parties using the cryptographic algorithms.
Types of DeFi
Since its inception, various types of DeFi models have been introduced in the market; some of the best types are listed below:
- Decentralized exchanges (DEXs): Online currency exchange platform that helps users exchange currencies for other currencies without trusting any intermediary.
- Wrapped bitcoins (WBTC): Sends Bitcoin to the ethereum network and can be used in ethereum DeFi systems.
- Prediction markets: Predict the future economy, bet on markets without any third party or intermediary.
- Lending platforms: These platforms perform their lending operations through smart contracts.
- Stablecoins: A cryptocurrency that stabilizes the price by connecting with a traditional asset (dollar or euro).
How does DeFi work?
DeFi operates on cryptocurrencies and smart contracts that don’t require third-party involvement. It simply functions through a peer-to-peer transaction system.
Today, our finances are governed by the financial institution that controls the sole authority to lock our accounts and seal our assets in case of adversity. The paperwork makes it time-consuming to understand every technical terms and condition, hidden charges, and other details.
Every cent of our money is passed through the financial institution that monitors our lending, borrowing, and spending activities and that exposes our day-to-day financial transactions inviting unnecessary offers, scams, and theft signals.
In DeFi, a smart contract simply replaces the financial body for carrying out the transactions.
A smart contract is nothing but an ethereum account that sends, receives, refunds, and holds the funds on certain conditions. It is unaltered and performs according to the programmed function.
Here’s a quick example of summarizing its operation.
A Decides to pay wages to B every week,A and B create a smart contract that allows weekly transactions on If and Then conditions.
The Wages will transfer from A to B as long as A has enough balance to carry the transactions.
The Wages will stop if B does not accept the funds or is not involved anymore with A.
Once A is out of funds, the transaction is automatically stopped.
No third party can come between A and B and act on their behalf to carry out future transactions.
Every smart contract is open to the public and has distributed copies; anyone can inspect, verify and validate their transactions. If any issues arise, They can inform the whole community to point out the glitches and failures.
It makes the smart contract immutable and indomitable, a much-needed feature that today’s financial institutions fail to provide.
How is DeFi different from Traditional financial Institutions?
Unlike Financial Institutions, you don’t need a bank account to use DeFi. An Internet connection and a simple ethereum smart contract is all you need to enter into the world of DeFi.
DeFi does not burden you with financial restrictions. It has codes that do not discriminate against you on your financial levels or judge you based on your income source.
Financial institutions give you tonnes of reasons for blocking your funds (for ex. bank strikes, new regulations, automated system error), etc. DeFi operates only on programmed conditions that cannot be changed or altered. Hence no third-party involvement in risking your funds.
DeFi is transparent, and every charge is accountable and open to scrutiny.
Governments cannot ban or close DeFi as a centralized authority does not control it. Hence they will run as long as the community keeps them running.
Trading hours have restrictions and limitations in certain time zones. DeFi allows trading 24/7 irrespective of country time zones.
Money transfer is quick, real-time, and hassle-free, unlike banks that take several business days to transfer funds from one party to another.
No premium charges or hidden commissions as DeFi operates on a peer-to-peer system.
Benefits of DeFi
DeFi has a lot of benefits to offer as many of its applications are yet to be explored. Here are some top benefits that made DeFi to the headlines:
- DeFi holds your money for you.
- You control the spending and borrowing activities; DeFi does not interfere with your privacy.
- Funds are transferred in no time.
- Transactions are pseudonymously recorded on a public ledger.
- The markets on DeFi are always open.
- DeFi is transparent; anyone can check the source code and validate the transactions.
What can you do with DeFi?
DeFi became a stable alternative for many traditional financial services and created many opportunities for various financial products required in the future. Here are the best applications that can perform with DeFi.
- Send and stream money around the globe.
Sending funds is as easy as sending mail. Just enter the recipient’s wallet address from your ethereum wallet, and funds will transfer within minutes. You can use your cryptocurrency to stream, store, buy, and rent according to your usage.
- Access stable currencies
Cryptocurrencies are highly volatile. The DeFi community solves this volatility by introducing stable coins that communicate with traditional currencies to reduce the risk of financial adversities.
- Borrow with or without collateral
Borrow money from a peer-to-peer lender or a pool-based lender. The DeFi borrowing system makes borrowing easy without any hidden charges. Borrowers can put up collateral for the lender, and it will activate automatically if the borrower fails to repay the loan. NFTs are booming assets and are getting wide acceptance for these kinds of borrowings.
- Access to global funds
You get access to decentralized global funds instead of local funds that help you in improving your interest rates
DeFi offers tax efficiency as they can help you receive funds without selling your Ethereum, which may invade taxes. Stablecoins are great alternatives to avoid Ethereum coin losses. You can enter into collateral for a stable coin loan that keeps your Ethereum coins safe and does not fluctuate in values.
- Exchange tokens
Thousands of ethereum tokens are exchanged regularly irrespective of time zones and location. The DeFi markets are always 24/7 up and open 365 days a year. Anyone can exchange tokens as the market is active globally.
- Grow your portfolio
DeFi introduced fund management products that let you grow your portfolio without any fund manager’s interference. It’s a technological feature that predicts the market and provides appropriate signals for investing.
- Fund your ideas
Crowdfunding can also use ethereum. The community can crowdfund your goals, the raised amount is transparent, and they can scrutinize further transactions according to the mentioned activities. If any transaction doesn’t meet its conditions, It gets refunded as like nothing happened.
Decentralized insurance will fill the gap of late payouts, inappropriate fund allocations, and third-party commission by introducing faster payouts, claimed funds and peer-to-peer transactions.
Top 5 DeFi Dapps that you must try:
DeFi is revolutionizing the financial ecosystem. We at the Dapp List are aligned with the same principles as we strive to curate a web3 ecosystem that is open, private, and decentralized.
Our explore, buidl, and invest are our flagship products that help developers and users join our platform and create future dapps.
With our ever-growing popularity and thousands of dapps already listed, we have curated the top 5 DeFi dapps that you must check out.
We also invite you to become our member to hunt and vote in our dapp community.
Here are our top 5 recommended DeFi Dapps:
Uniswap is the most liquid AMM-style decentralized exchanges in the world, holding over 2 billion USD in liquidity provider deposits as of time of writing.
Curve is an exchange liquidity pool on Ethereum designed for extremely efficient stablecoin trading low risk, supplemental fee income for liquidity providers, without an opportunity cost.
Compound is an algorithmic, autonomous lending & borrowing protocol that unlocks a universe of open financial applications.
The Maker Protocol allows users to generate Dai by leveraging collateral assets approved by “Maker Governance.
Synthetix is a decentralized platform on Ethereum for the creation of Synths: on-chain synthetic assets that track the value of real-world assets.
DeFi is not just an alternative but an open-source movement to address the age-old issues of authority, dominance, transparency, and third-party interference.
Since DeFi operates on blockchain technology, it is efficient to mix and match it with various layered stacks based on blockchain to gain maximum output from a decentralized product.
DeFi can soon be a household name when every transaction will be private between two parties and can be scrutinized anonymously by the community.
Loans, interests, trading can be done by maximum people despite financial restrictions.
The financial literacy rate will spike due to the global DeFi applications.
More of the DeFi potential is unpredictable and yet to be explored.
Which DeFi will you try first?
Check all DeFi dapps listed on The Dapp List.