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DeFi is the collective term for Decentralised Finance and means providing financial services without depending on third parties. DeFi ecosystem is an emerging method of financial applications and protocol based on blockchain ledgers. Its mission is to get rid of central authority and allow you to take complete control of your money. With this aim, DeFi is censorship-resistant and built on an infrastructure of the blockchain ledger, cryptography, and smart contracts.
Simply put, Decentralised Finance is mainly built on the Ethereum blockchain to create decentralised applications, AKA dApps. Decentralised Finance is an alternative route to take loans, deposit, lend and borrow money and execute any transaction through smart contracts on the blockchain. Many DeFi applications operate on the Ethereum public blockchain, and since they involve the use of smart contracts, they can perform on a peer-to-peer basis.
To provide each Decentralised Finance system, we need to know about various necessary integrants. The following details aid us in perceiving the primary pillars of the DeFi system.
A decentralised infrastructure is required in order to run decentralised services, and this is where the Ethereum blockchain, with its programmable capabilities, comes to play.
Stablecoins are cryptocurrencies with their value pegged to another asset like fiat money, exchange-traded commodity, or another cryptocurrency. DAI is an example of stablecoins built on the Ethereum blockchain and is pegged to USD. Read here to learn what stablecoins are.
A Decentralised Exchange allows users to exchange their cryptocurrencies on the blockchain, and they don't require a third party to validate the swaps. All you need to know about DEX is just one click away!
DeFi is designed to provide various applications to connect lenders and borrowers, perform certain qualifications of the loans, deposit fiat money through a decentralised application and earn interest (yield farming). Some examples of DeFi projects that allow users to lend and borrow are Compound, MakerDAO, and AAVE.
Throughout this article, we kept mentioning that DeFi comes with numerous advantages, but we have not been specific. Let’s get into details and check out some of these cool features that DeFi brings about.
Decentralised Finance is made up of permissionless products and applications and doesn’t rely on banks. It is an open ledger protocol that improves open access with trust.
In addition to the mentioned features of decentralisation, immutability assures security. Immutability prohibits manipulating any record on the blockchain network, and each block of information like transaction details uses a cryptographic principle or a hash value to keep the data unaltered.
Another striking feature of DeFi is its transparency. Each transaction occurs on an open-source ledger based on the Ethereum blockchain, and it should be verified by the nodes. After the validation process, it will be distributed on the network. DeFi applications could make it easier to identify who made changes to a transaction and avoid financial scams.
Because DeFi is unregulated, flexibility is another positive feature for Decentralised Finance that is worth mentioning. Although this lack of regulation allows for creating and applying services, in principle, without any limitations, it also easily can be used for fraudulent activities.
DeFi protocols are based on the top of blockchain and can be used by anyone. The lack of barriers to entry means anybody with programming skills can take part in building financial services and tools in public blockchains.
The reasons that differentiate DeFi from traditional finance don't relate to the terms of the types of service it seeks to provide. The core difference refers to how Defi performs those services.
Various elements and factors have worked hand in hand for Decentralised Finance to come into being. The emergence of Bitcoin was one of the first and most important events that made DeFi possible since Bitcoin allows sending payments around the world in a decentralised manner. Due to the simple structure of the Bitcoin blockchain, Bitcoin enabled the creation of Ethereum blockchain for all top DeFi protocols. Ethereum blockchain provides programmable digital money by using smart contracts, which are the basis of DeFi.
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