Decentralized Finance (DeFi) is a new and revolutionary way to do financial business anywhere in the world without central banks or governments. The purpose of this is to decentralize how the traditional financial system of lending, investments, payments, and wealth management are done.
How Does DeFi Work?
DeFi is financial software built on a blockchain. This provides a peer-to-peer financial network that allows you to deposit cryptocurrencies on smart contracts as collateral, and borrow against them with interest rates based on supply and demand. You are also able to create or use stablecoins that are pegged to the US dollar to control the volatility you see with Bitcoin and other cryptocurrencies. These applications include digital assets, smart contracts, protocols, and dApps.
Types Of DeFi Products
There are various products out that use DeFi. Collectively, they are referred to as open finance since it’s an ecosystem where digital assets, blockchains, and open protocols are mixed with traditional financial structures. Here are just a few examples of many types that are available today.
Open Lending Protocols
Open lending protocols are digital money lending platforms built on a blockchain. These have become very popular recently because it works just like a bank except you are the owner. You deposit money and turn it into a digital asset. When someone borrows the digital asset, you earn the interest. Everything is settled through smart contracts that dictate the loan terms, connect lenders and borrowers, and distribute the interest with total transparency of the blockchain with no middle man involved.
A decentralized exchange (DEX) is a cryptocurrency exchange that has no central authority like Coinbase and Binance. Traders are able to exchange directly between one another through an automated peer-to-peer process. You submit a buy/sell request to the order book host. An interested party then creates a counterorder and digitally signs it. After this is completed, both orders are sent to a smart contract on a blockchain where the transaction is executed. Only then will the transfer of crypto be sent to the users’ wallets.
Imagine borrowing money from an open lending platform and paying your company’s supplier halfway across the world in another country. Instead of the long wait and high fees, you could simply deposit a cryptocurrency into a smart contract, receive an asset loan, and pay the supplier within minutes. This protocol could revolutionize how finance companies do business around the world by lowering the cost, saving time with no borders.
Decentralized And Transparent
Even though it is still in its infancy, DeFi platforms are spreading like wildfire and can be found almost everywhere from gaming to gambling and voting. All done with transparency and fully decentralized.