Defi stands for decentralized finance. It is a system to eliminate middlemen from the financial transaction. It has been mostly created on the Ethereum platform. Defi has to work with stablecoin that is pegged to a particular currency such as the Dollar or Euro. Defi contracts imbibe stable coins at the core of their functionalities. Some of the stablecoins in the market today are USDT, USDC, TrueUSD, Dai, and Paxos. Currently, the value of decentralized finance contracts is $8 Billion. In decentralized finance, borrowers put their digital assets as collateral incorporated in the smart contract until the loan is repaid. Some of the DeFi lending platforms are Compound, Aave, and Maker. DeFi exchanges do away with middlemen and can act as a custodian of funds and digital assets in a peer to peer transaction. Some of the examples of decentralized exchange transactions are Curve, Uniswap, Bancor, Kyber, and Synthetix.
A Decentralized Network
Using a decentralized open-source network, many traditional actions such as lending, borrowing, buying, and selling of securities can be performed. There are many advantages of decentralized finance besides its elimination of middlemen such as banks and financial institutions. It can be worked on an algorithm to create feasible smart contracts in each transaction of borrowing without the need for a lawyer or a bank. It is a completely decentralized process. There are also chances of more stability in the system because of the existence of stablecoins that is used to run DeFi at the first place itself. It allows borrowing even without the need for a bank account or an application review. Here, the whole system is created using various algorithms that fit into the smart contract. DeFi protocol also caught on something called “Yield farming” where the users can be awarded tokens based on their participation in the token economy and providing liquidity to the protocol.
Elimination of the Third Party
Currently, the trading of securities and cryptocurrencies is being done through a third-party exchange. Using DeFi, such a need for a third party can be eliminated. Decentralize finance can create an exchange system using smart contracts without the involvement of the third party platform into the whole contract. There’s also an instance where the DeFi based Uniswap has surpassed the third party exchange platform provider Coinbase in the context of trading volume achieved by the platform.
There’s also the system where the DeFi network provides for pooling of investment funds similar to automated funds and asset aggregators. Some of the examples include Melons and Set Protocol.
There is also an option of betting on something happening or not happening in the future in a completely automated manner using DeFi. This option is usually used to protect against a bug in a smart contract. There is potential that this option will be used in the future to protect against natural disasters and accidents.
Decentralized finance also considers as an option of combining different smart contracts on a real-time basis where if you invest $200,000 at 8% interest then you automatically invest that interest into another asset or use it as collateral for a loan. All of these can be done by using DeFi network.
The future is full of inventing exciting new uses using DeFi network. This is one of the most talked-about networks in the cryptocurrency market. It has to be seen what the future really holds for DeFi network in other fields.