A Guide To DeFi: The Next Big Thing Since Bitcoin
Ever since Bitcoin’s inception in 2008, decentralization in the finance industry has been evolving and seeping into more consumer and industrial applications. Now, in 2020, Decentralized Finance, or DeFi, has become a defining application of blockchain. It is without a doubt the biggest thing since Bitcoin. However, it is important to understand that DeFi is an umbrella term. In other words, DeFi is a term used to describe a wide variety of financial applications, mostly driven by cryptocurrency or blockchain, with the purpose of eliminating middlemen in finance. What are these applications? How do these work? Where’s the future headed? Let’s find out the answer to all these questions and more.
Ever since Bitcoin’s inception in 2008, decentralization in the finance industry has been evolving and seeping into more consumer and industrial applications. Now, in 2020, Decentralized Finance, or DeFi, has become a defining application of blockchain. It is without a doubt the biggest thing since Bitcoin. However, it is important to understand that DeFi is an umbrella term. In other words, DeFi is a term used to describe a wide variety of financial applications, mostly driven by cryptocurrency or blockchain, with the purpose of eliminating middlemen in finance. What are these applications? How do these work? Where’s the future headed? Let’s find out the answer to all these questions and more.
What is DeFi?
DeFi, as mentioned earlier, describes a wide variety of applications aimed to eliminate middlemen in the finance sector, ultimately increasing efficiency and decreasing associated costs by taking advantage of blockchain technology.
The ambition is to develop a substitute for the existing centralized financial system: a system where you have exclusive control over your financial assets. Though DeFi is still developing, there are several use cases, some of which are mentioned below:
1. DEX
Decentralized Exchanges (DEXes) like CryptoLocally are the most popular application of DeFi. DEXes are P2P cryptocurrency exchanges that allow their users to directly trade their crypto assets without the necessity of a central authority figure. For example, every transaction on CryptoLocally is secured by utilizing a combination of smart contracts and escrows.
2. DeFi Lending
Another popular disruption caused by DeFi is in the field of lending. P2P lending has become extremely commonplace, with tools such as Cryptolocally’s Finance Wallet V2 gaining a lot of traction.
This offers crypto holders a way to earn passive income on their holdings, making DeFi an attractive investment. These platforms eliminate intermediaries like banks and other such lending institutions by connecting those looking to earn some interest with those in need to borrow.
3. Tokenization
Tokens are virtual assets that are created, issued, and managed on a blockchain. By taking advantage of Ethereum’s tokenization feature, DeFi platforms are able to offer tokens to provide users an attractive way to invest in their platforms.
These tokens can be used for anything from referrals to incentives, and even governance (each token is unique, and is created for a different purpose). Having such utility contributes to increasing the liquidity and user base of the application.
How Does DeFi Work?
Though Bitcoin is technically the first successful use case of DeFi, currently most platforms make use of the Ethereum blockchain. The vast majority of DeFi coins can be found operating on the Ethereum blockchain. Portals like DeFi Pulse give users like us a real-time look at the value locked into DeFi projects. Amongst the most popular DeFi coins are DAI and Solana. Ethereum, apart from supporting tokenization as mentioned earlier, also brought into the picture two very essential cogs essential for DeFi to succeed — dApps and smart contracts.
dApps, also called Decentralized Applications, are essentially computer programs that run on a P2P network that provides access to the blockchain. By utilizing smart contracts, dApps were created to cater to the needs of the financial sector, giving birth to DeFi.
Smart contracts are self-executing contracts with the terms of the agreement directly programmed into the blockchain in the form of code. Once the conditions mentioned in the smart contract are met, the contract is executed, eliminating the necessity of human beings, and central authorities in extension.
In the case of DeFi, these contracts are usually focused on transferring cryptocurrencies (In the case of DEX) or adding liquidity to liquidity pools (in the case of Tokenization), etc.
In essence DeFi apps, by utilizing the trinity of Blockchain, dApps, and smart contracts, are able to create permissionless, trustless, automated, and decentralized platforms that cater to the specific needs of the financial sector.
What The Future Holds
DeFi has been disrupting the finance world for quite some time now. Fresh concepts such as Yield Farming, Money Legos, etc., are made possible thanks to DeFi coins. And with more time, there’s definitely more to uncork.
That being said, DeFi does have some challenges that it needs to overcome before it can become truly mainstream.
For instance, due to the inherent reliance on blockchains, transaction speeds can take quite a hit. With Ethereum’s blockchain able to transact only 15 transactions per second as of 2021, massive steps are definitely required. Of course, this problem is already being addressed, as Ethereum 2.0 is reported to receive a huge upgrade to a massive 100,00 transactions per second.
Security is another concern area for DeFi apps, as most applications tend to be open-sourced. This means that the code is available for everyone to inspect, and might possibly find a way to exploit the codes. Solutions such as Decentralized Insurance to compensate for losses from such hacks are in discussion, but we’ll have to wait and see what the future holds for the DeFi industry.
How to Invest in DeFi
While DeFi coins are flooding the market, it can be challenging to pick quality projects amidst the crowd. One way to assure yourself of quality is to look up DeFi coins listed on CryptoLocally. Support coins on the exchange are added via a community vote using the exchange’s native token — GIV. This effectively means that among DeFi projects, it’s only the ones trusted and supported by large communities that get added on the exchange. So you’re assured of a good choice.
