What Is Decentralized Finance?
DeFi are financial services with no central authority. It involves taking traditional elements of the financial system and replacing the middleman with a smart contract. The transition from conventional, centralized financial networks to peer-to-peer finance facilitated by distributed ledger technology is known as decentralized finance or DeFi.
How Does DeFi Work?
DeFi uses a multi-layered architecture. Every layer has a distinct purpose. The layers build on each other and create an open and highly composable infrastructure that allows everyone to build on, rehash, or use other parts of the stack. It is also crucial to understand that these layers are hierarchical: they are only as secure as the layers below. If, for example, the blockchain in the settlement layer is compromised, all subsequent layers would not be secure. Similarly, if we were to use a permissioned ledger as the foundation, any decentralization efforts on subsequent layers would be ineffective.
What are the benefits of DeFi?
Decentralized finance leverages blockchain’s key principles to increase financial security, permissionless banking, enable an interoperable and standardized economic structure, increase transparency open-source adoption and liquidity, and unlock liquidity and growth opportunities. Here’s how:
Smart contracts with a high degree of programmability automate execution and allow the development of new financial instruments and digital assets.
Tamper-resistant data coordination through the open architecture of a blockchain increases safety and traceability.
The modular software stack of Ethereum guarantees that DeFi protocols and implementations integrate and supplement one another. Developers and product teams will build on top of existing standards, configure user interfaces, and add third-party applications using DeFi.
Each transaction on the public Ethereum blockchain is broadcast to and validated by other network users. This level of openness surrounding transactional data facilitates in-depth data analysis and assures that network operation is open to all users. Ethereum and the DeFi protocols that run on it are both designed using open source code that is viewable, auditable, and extendable by everyone.
Unlike conventional finance, DeFi is characterized by its free, non-custodial, and permissionless access: anyone with an Internet connection can access DeFi applications based on Ethereum, regardless of their location, credit history or minimum amount of funds needed.
By interacting with permissionless financial applications and protocols through Web3 wallets such as MetaMask, DeFi market participants maintain ownership of their assets and control over their personal data.
How To Get Involved with DeFi?
The best way is to start building Smart Contracts on it. If you are a developer, then definitely start learning through “Plutus Pioneer Program” by Dr. Lars.
Have a look at the dev material created by the Cardano community including us.
We have founded “Lovelace Academy” with Maria who is operating CARDS stake pool and Keith who is operating SAFE stake pool. We founded “Lovelace Academy” specifically to help developers onboard Cardano. For developers who want to build on Cardano, currently, we see a lot of resources here and there but there is no one go-to place where you can find end-to-end documentation which is easy to understand and at the same time easier to copy and paste so that you can execute the code right away. With this problem statement in mind, Keith has created “Lovelace Academy” where developers can find simple codable documentation starting from scratch.
We even got funded by Project Catalyst in the Fund2 round. So, if you are a developer who wants to start building on Cardano but don’t know where to start, then I highly recommend you visit our “Learn” page.
We also have a YouTube channel with the same name “Lovelace Academy” where you will find very useful videos about the Cardano ecosystem.
The Potential Use Cases for DeFi – What Are They?
DeFi is being applied in many verticals and listed here are the some of the top use-cases of DeFi.
Borrowing and Lending
Peer-to-peer borrowing and lending is the most widely used application of the DeFi ecosystem. DeFi allows users to take a loan without any applications review or a bank account. In some DeFi apps, the borrower need not find a lender, instead, the smart contract itself acts as a lender, and interest is calculated based on supply and demand. In some other DeFi apps, a fixed interest rate is made for the loans. DeFi makes the process of lending and borrowing much easier and time-saving.
Decentralized Exchanges are one in which peer-to-peer transactions of funds occur without a central authority. As in DEX, the assets are not in the custody of the exchange platform, the risks such as hacking, price manipulation, and thefts are reduced. Thus, DeFi space provides better operations of DEX platforms.
Some of the popular DEXs in the Defi space are Uniswap, Liquality, Airswap, and so on.
As DeFi is still in its infancy stage, it still faces risks around smart contract bugs and breaches. Since then, many innovative insurance alternatives have arrived to assist users in buying coverage and protecting their holdings.
For Example, Nexus Mutual provides smart contract cover that protects the unintended use of any smart contract codes.
Will Decentralized Finance Replace Most Financial Institutions?
The short answer is “Yes”. Initially, it may seem as if all these new billions of dollars of financial activity moving around DeFi through investing, borrowing, leveraging, options, and derivatives were just for sophisticated representations of centralized finance. However, upon delving into the DeFi ecosystem’s logic and getting into the research, it becomes clear how an integrated set of protocols and implementations based on a range of trust principles via a smart contract allow effective new patterns of value creation, societal changes, and delivery for the masses. If the cost of creating digital assets continues to fall, so does the ability of individuals worldwide to conduct financial transactions without the assistance of trustworthy intermediaries such as escrow accounts, banks, or lawyers.
You cam monitor DeFi currencies’ metrics on CoinSocialStory.