DeFi is becoming increasingly popular as a primary use for cryptocurrency. Decentralized financial services, such as decentralized exchanges, decentralized money markets, and decentralized insurance firms, are referred to as DeFi. Its goal is to decentralize financial services and replace them with decentralized organizations that allow everyone to participate.
Bitcoin is a type of money that is not regulated by any central bank or government, as you may already know. It may be sent to anybody, anywhere in the world, without the need of a bank or other financial institution. Bitcoin is a type of decentralized currency. However, money transmission is simply the first of many components in a financial system.
We utilize a number of services nowadays, in addition to transferring money to one another. Loans, savings plans, insurance, and stock exchanges, for example, are all money-related services that work together to form our financial system. Our financial system, as well as all of its services, is now totally centralized. Banks, stock exchanges, insurance firms, and other financial organizations all have a person or a business in charge of controlling and providing these services. Mismanagement, fraud, and corruption are just a few of the risks that come with this centralized financial system, or CeFi for short. But, in the same way that Bitcoin decentralized money, what if we could decentralize the financial system as a whole? That is precisely what DeFi is about.
DeFi refers to financial services that are not governed by a central authority or have no one in control. We may create exchanges, lending services, insurance firms, and other organizations that have no owner and are not controlled by anybody by using decentralized money, such as some cryptocurrencies that can also be programmed for automated operations.
The infrastructure for designing and operating decentralized services is the first step in creating a decentralized financial system. Ethereum, fortunately for us, does just that. Ethereum is a "Do It Yourself" platform for creating decentralized applications, commonly known as "apps" or "Dapps." We can build automated code, also known as smart contracts, to administer any financial business we want to establish in a decentralized manner using Ethereum. This implies that we define the rules that govern how a service operates, and once those rules are deployed on the Ethereum network, we lose control of them; they are immutable. We may begin developing our decentralized financial system after we have a framework in place, like as Ethereum, for generating decentralized apps.
Money is, of course, the most basic requirement of any financial system. “Why not use Bitcoin or Ether, Ethereum's currency?” you might wonder. While Bitcoin is decentralized, it only has extremely limited programmable capability and is not compatible with the Ethereum platform. Ether, on the other hand, is programmable and compatible, but it is also extremely volatile. We'll need a more stable currency to function within this system if we want to develop dependable financial services that people wish to utilize. Stablecoins come into play here.
Stablecoins are cryptocurrencies that are linked to the value of a real-world asset, such as the US dollar. Because DeFi would necessitate some form of central authority, we'll want to utilize a stablecoin that doesn't rely on fiat money reserves to maintain a peg. This is when DAI enters the picture. DAI is a decentralized cryptocurrency that is linked to the US Dollar, with one DAI equaling one USD. DAI is secured by crypto collaterals that can be viewed publicly on the Ethereum blockchain, unlike other prominent stablecoins whose value is directly backed by US Dollar reserves. DAI is over-collateralized, which means that if you deposit $1 in Ether, you may borrow 66 cents in DAI. Simply repay the DAI you borrowed when you want your Ether back, and the Ether will be released. You may just buy DAI on an exchange if you don't have any Ether to lock up as collateral. Because DAI is over-collateralized, the value of the locked Ether backing the DAI in circulation will very certainly remain at 100% or more even if Ether's price becomes extremely volatile. The DAI stablecoin is essentially a smart contract that runs on the Ethereum blockchain. As a result, DAI is a fully trustless and decentralized stablecoin that cannot be censored or shut down, making it an ideal form of money for other DeFi services.
It's time to add some more services to our decentralized financial system now that we have stable decentralized money. The decentralized exchange, or DEX for short, is the first application we'll look at. DEXs follow a set of rules, known as smart contracts, that allow users to buy, sell, and exchange cryptocurrencies. They, like DAI, run on the Ethereum platform, which means they don't have a central authority. There is no exchange operator, no sign-ups, no identification verification, and no withdrawal fees when you trade on a DEX. Smart contracts, on the other hand, enforce the rules, conduct deals, and securely manage cash when needed. Furthermore, unlike a centralized exchange, there is rarely a requirement to deposit cash into an exchange account prior to executing a deal. This avoids the significant danger of exchange hacking that all centralized exchanges face.
But there's more to decentralized financial services than that. Now we'll look into decentralized money market services that connect borrowers and lenders. Compound is an Ethereum-based lending and borrowing Dapp that allows you to lend your cryptocurrency and earn interest on it. Alternatively, perhaps you require dollars to pay your rent or purchase food, but all you have are bitcoins. If that's the case, you can use your cryptocurrency as collateral to borrow money. The Compound platform links lenders with borrowers, enforces loan conditions, and distributes interest automatically. The technique of generating interest on cryptocurrencies has recently become increasingly popular, sparking the term "yield farming," which refers to the effort of putting crypto assets to work in order to maximize profits.
Decentralized insurance is another example of a DeFi service. All of these new financial products come with dangers, as we will discuss momentarily, so why not establish a service that protects my funds in the event that something goes wrong? So, how about a decentralized platform that links individuals who are prepared to pay for insurance with those who are willing to insure them for a fee, all without the intervention of an insurance company or an agent?
DeFi services interact with one another, allowing you to mix and combine different services to create new and interesting possibilities. This is similar to how you may utilize various LEGO blocks and get creative with anything you want to construct. As a result, the term "money legos" was developed to describe DeFi services. For instance, you may build the following service using several money legos: You begin by utilizing a decentralized exchange aggregator to locate the best exchange for exchanging Ether for DAI. After that, you choose the DEX you wish to trade with and complete the transaction. Then you earn interest by lending the DAI you received to borrowers. Finally, you may include insurance in this procedure to ensure that you are protected in the event that something goes wrong. That's just one of the numerous possibilities provided by DeFi.
You may obviously tell what benefits DeFi provides by now. To mention a few, there is transparency, interoperability, decentralization, free for all services, and a customizable user experience. There are some hazards, however, that you should be aware of. The most significant danger is that DeFi is still in its early stages, which means things can go wrong. Smart contracts have had problems in the past when individuals didn't establish the rules for specific services appropriately, and hackers discovered inventive methods to steal money by exploiting existing vulnerabilities. If you decide to try out any of the current DeFi services, make sure you do so with money you can afford to lose if something goes wrong. Also, keep in mind that a system is only as decentralized as its most central component. Before investing in a product or service, it's critical to understand how it works so you're prepared for any difficulties that may arise.
The DeFi movement appears to have achieved early adopter status, and the following years will reveal if it succeeds in crossing the divide into widespread acceptance. There's no denying that a decentralized financial system might help a large section of the people who are now subjected to financial discrimination, exorbitant fees, and inefficient money management.
DeFi is the future of blockchain and finance backed by technology. Decentralization always comes with a great advantage. This is what makes a non-custodial wallet application like the one from https://atomicwallet.io/, a unique multi-coin coupled with it's interesting features such as the in-built exchange and staking platform.