Blockchain technology, with the emergence of cryptocurrency, took the world by storm. This space is dynamic and innovations keep occurring. One outstanding application of blockchain technology is – Decentralized Finance, DeFi.
This article delves into what is DeFi, its popular applications, and more.
What is DeFi?
Decentralized Finance (DeFi) refers to a term that includes Peer-to-Peer (P2P) financial services or applications operating on a public blockchain network. You can lend, buy, sell, borrow, trade, earn interest, insurance, etc. via decentralized apps (dApps).
DeFi requires infrastructure services like the Ethereum blockchain network for programming and running decentralized financial services. Developers on the Ethereum network create code known as smart contracts, which will automatically execute when certain conditions are met. They use these code statements or smart contracts to manage financial services.
The best DeFi applications focus on creating greater transparency and flexibility in financial operations, reducing costs as well. The greatest advantage is anyone can create, modify or mix and match the existing DeFi products to improvise and develop their own products.
Popular applications of DeFi
DeFi is an emerging arena of blockchain which offers various useful applications in the domain of finance. Some of these are:
Decentralized Exchanges (DEX)
Decentralized Exchanges make it possible for traders to buy, sell or trade cryptocurrencies, without the need for any intermediaries. You don’t need exchange operators, ID Verification devices or withdrawal fees. All aspects are taken care of by smart contracts which are a set of code statements that run automatically when certain conditions are met, on the Ethereum network.
Stablecoins are a special kind of cryptocurrency designed to be pegged to a reference asset such as a fiat currency like USD or exchange-traded commodities or another cryptocurrency. They address the challenge of price volatility in cryptocurrency while ensuring all other features and benefits are retained. One example is Tether (USDT) which is a stablecoin that is pegged to 1 US dollar.
DeFi-based lending platforms are increasingly becoming popular. With DeFi lending protocols, you can use your crypto assets to receive loans. It is easier and more affordable compared to traditional banks. Moreover, you also earn interest for lending your money. DeFi lending platforms operate on smart contracts, thereby obviating the need for intermediaries like banks or financial institutions for transactions.
Yield farming is one of the best modes of DeFi applications that involves increasing your crypto holdings using existing assets. It refers to staking or lending crypto assets to generate returns or rewards in the form of additional cryptocurrency. Using these DeFi protocols, the crypto holders can farm more crypto holdings and increase their digital assets.
It makes insurance cheaper and more transparent. As the process is automated, the coverage is affordable and pay-outs are quicker.
Decentralized Finance (DeFi) is the next wave of innovation in the blockchain technology space. It holds enormous potential to transform the realm of finance and also reduce financial disparities among different sections of the global population. The applications of DeFi would enhance transparency, fairness, and cost-effectiveness in financial transactions.