A Beginner's Guide to Decentralized Finance (DeFi)
It will be an understatement to say that DeFi is currently making news. You can see it everywhere. But, what exactly is DeFI?
DeFi stands for Decentralized Finance. It refers to the open movement when it comes to creating permissionless and open-source financial services that are transparent, trustworthy, and reliable.
In short, DeFi is the financial application ecosystem that runs on top of current blockchain networks. The users are free to operate within the ecosystem without the need to take permission from any centralized authority. This also means that the users are their own bank as they take care of their own assets and how they use it to interact with the systems available within the DeFi ecosystems, including decentralized applications(dApps).
DeFi’s approach will give users the ability to have an alternative to the current financial services, including how they deal with trading, insurance, loans, and savings. Also, the barrier to use the DeFi services are non-existent as the user only needs to have a smart device and internet connection.
What makes DeFi possible?
The landscape of DeFi is made possible because of smart contracts. Smart contracts are programs that run on top of blockchain and can be configured to execute automatically if the conditions are met. The ability to program on blockchain makes it a whole new playing ground. The developers can create simple, smart contracts that check for simple conditions and execute the contracts. But, smart contracts also give the developer the ability to run complex applications. These applications are known as dApps and are also central to the success of DeFi.
So, what exactly is dApp? dApp stands for decentralized applications. Just like smart contracts, they also run on top of the blockchain. However, they are complex applications that do not need a centralized approach.
All of these give rise to DeFi dApps which can be used to create stablecoins. Stablecoins are cryptocurrency whose value is pegged against the US dollar -- giving the necessary stability to digital cryptocurrency required for financial activities such as asset exchange, loans, and so on!
As we said earlier, DeFi is currently making news. But, what makes it so important, and is it worth the hype that it is getting? Well, let’s explore.
DeFi gives power back to the people when it comes to their finances. This means that DeFi is going to change how money operates in our lives. Until now, we are using centralized systems to operate our money. But, now that’s gonna change. A decentralized approach surely brings in multiple benefits including security, the ability to actually own your own assets, and use them accordingly.
DeFi’s ecosystem is also growing rapidly which makes it even more enticing. The importance of DeFi can also be gauged by the fact that it offers equal participation to everyone and also allows the authority distribution -- allowing everyone equal space to all participants.
In contrast with traditional financial solutions such as a bank, DeFi dApps offer tons of benefits including the following:
DeFi dApps rules are written using smart contracts that are deployed on top of the blockchain. This gives them a distinct advantage compared to business which is managed by institutions and organizations. The DeFi dApps are also capable of running without any human intervention whatsoever. However, there are instances where developers need to work on the dApps to ensure that it runs without any problems.
DeFi dApps are not restricted to any geographical location. This makes them global from the point they are made live on the internet. The idea of globalization is exciting as it ensures that anyone around the world can join the service and become part of the network. But, this doesn’t mean that the DeFi dApps are free from regulations. The local governments can put regulations on the service which needs to be addressed before it can utilize its full potential.
DeFi dApps is open to all. What it means is that the code written for the dApp is transparent and can be audited by anyone who is curious enough to know how it is working and verify if it is working as intended or not. This not only helps build trust but also ensures that the DeGi blockchain dApp doesn’t contain any form of errors or issues that can lead to data loss or theft. To make sure that privacy is maintained at all times, pseudo-identity is utilized to hide real-identity.
Unlike new blockchain frameworks and solutions, DeFi is completely permissionless. So, what does it mean? It means that anyone can join the DeFi platform, service, and network. It also lets developers create on the platform without the need to take permission from an entity. In contrast, the finance industry requires a lot of paperwork and authorization before an app and service can go live.
DeFi dApps also offers the user to completely change the user interface. So in case the user does not like the interface, he or she can change the interface according to their requirement. All the user needs to do is use the third party interface. If the user is advanced, they can also decide to build their own user interface.
DeFi dApps are also interoperable which means that it is possible to combine and compose different DeGi blockchain dApps into one and provide a completely new experience for the user.
The DeFi ecosystem is nothing without its dApps. In its early days, it is easy to say that there are some amazing services and products. But, as a user, you should also be vigilant about what you are trying out as some dApps might not be as advertised and can contain malicious actions to steal your digital assets.
Maker is one of the interesting projects as they are working on their DAI stablecoin. The stablecoin is pegged against the US dollar which makes it handy for doing transactions in the crypto world. As DAI is new, it doesn’t see as much volatility, but that can change with time.
Another interesting project is the Compound. It is a lending and borrowing app running on top of the blockchain. So, you can use your crypto to lend on the platform and earn interest on it. It is very handy and can be used in other scenarios as well.
This leads us to the end of our beginner’s guide to decentralized finance(DeFI). We learned how DeFi works and how it can be used to provide better financial freedom to the people. Its limitless reach unlocks new doors, and that’s why you see the DeFI hype going around. The 101 Blockchains's Introduction to DeFi - Decentralized Finance Course is a reliable option for more than its convenience and comprehensiveness benefits. Candidates get the opportunity to learn Decentralized Finance (DeFi) from the perspective of industry experts with a tinge of simplicity.
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