What is Decentralized Finance (DeFi)?

Decentralized Finance is a budding system of finance to enable transactions between individuals and businesses more efficiently. In Decentralized Finance (DeFi), Blockchain, and Cryptocurrencies are being made use of.

One of the most important advantages of this type of system is that a lot of cost and time can be saved since there will be no intermediaries, such as banks. 

Even if all these claims sound quite promising, there are some kind of challenges that Decentralized Finance (DeFi) has to overcome in order to unlock its true potential.

As already mentioned, Decentralized Finance is not yet an established system of transaction and is still in the process of development. 

This article will help you understand everything you need to know about this emerging system, its basic and advanced functionalities, how to use it in the right way, some examples to give you better comprehension, and also a couple of Frequently Asked Questions (FAQs) on it. 

How Does it Work?

Well, this is the most important part of getting to know about this innovative style of financial transaction. The working mechanism of Decentralized Finance (DeFi) will be conducted through several aspects, and some of them have been discussed below.

1. Blockchain Technology

Public Blockchain Technologies are one of the most prominent mechanisms through which Decentralized Finance will be working. Ethereum can be stated as one of the major examples.

A decentralized infrastructure is quite inevitable for this system to work seamlessly, and thus, Blockchain Technologies such as Ethereum can be a reliable option without fail, since it can offer transparency for every transaction happening within. 

2. Smart Contracts 

These contracts would be written in the form of code, and they have a self-executable nature in Blockchain Technology.

If this can be successfully implemented in the transactions, enforcing the terms of the agreement would not be a headache anymore. This helps in eliminating the unnecessary intermediaries, stealing time and resources. 

3. Decentralized Applications (dApps)

When it comes to the usability aspects of any innovative move in the financial transactions sector, it is important to dish out the services through an application.

Here is where dApps come into play. These dApps’ working mechanisms align with the Blockchain Protocols, making it never compromise on transparency. 

With the widening popularity of such applications, similar services offered by centralized institutions can be gradually replaced partially or completely.

The customers will no longer face the hassle of interacting with a centralised institution and the associated paperwork and formalities to get their needs done, saving big chunks of time and energy for sure. 

4. Peer-to-Peer (P2P) Interaction 

Peer-to-peer (P2P) interaction is the fundamental objective of implementing systems such as Decentralized Finance (DeFi).

This would enable people and businesses to interact and transact with each other without the interference of centralized institutions and brokerages, such as banks, in between. 

Examples of Decentralized Finance (DeFi) Projects

Now that we have discussed everything you need to know about these all-new Decentralized Finance (DeFi) projects and the mechanisms by which they will be working.

However, we haven’t introduced you to some of the firms nearing true success in this regard. So, here you go. 

1. Maker

It is ranked as one of the most successful firms among the Decentralized Finance projects working around the world. One of the most interesting features of this App is that a user will be able to borrow money easily using their cryptocurrencies as valid collateral. 

This is currently impossible when you try to borrow money using centralized institutions and brokerages such as banks. Transactions can be done using the application, Oasis by Maker. The only condition would be that your collateral must be of a greater value than the money that you are planning to borrow. 

2. Lido

Lido is another form of Decentralized Finance (DeFi) that you can see succeeding in the financial industry. Here, the transactions are secured through a system called “proof of stake”.

Just like Maker, the users can use their cryptocurrencies as collateral. Here, the users are referred to by the name “validators”. In return, the validators can earn transaction fees. 

Lido also enables its users to withdraw their stakes anytime, making it one of the most convenient options for short-term investors. Staking Pools are another attractive service by Lido for Solana, Polygon, Kusama, and Polkadot, making it stand out from other competitors in the market. 

Another unique feature provided by Lido is that it allows you to mix your Ether stakes with others. This enables you to widen your horizons in stakes without the need to stick to just any one of them. 

3. Compound 

Compound is another Decentralized Finance (DeFi) firm that is worth talking about. Compound Labs is the creator of Compound in San Francisco in the year 2017.

The Ethereum Blockchain is the major working protocol of Compound. You are allowed to transact with a total of 9 tokens in Compound for the time being. Cryptocurrencies and Stablecoins are two among them. 

4. Curve Finance 

Curve Finance is the one platform that is widely known for trading Stablecoins. Make sure you are being a bit cautious while trading on this platform, since here you will be asked to pay a reasonable amount as a trading cost.

If you give protocol liquidity in this platform, you will be able to generate a small percentage of interest on the Curve Tokens (CRV). 

5. HEX 

If you are looking for a platform with the highest interest rates, HEX is the one for you. As per the latest records, $13.93 billion is the total value of HEX, approximately.

However, make sure to analyse the market trends carefully before investing in this, since there are predictions of a steady decline in its interest value in the near future. 

Also Read: What are Spot Bitcoin ETFs and How Do They Work? 

Conclusion 

The future of Decentralized Finance (DeFi) is almost a bright one, even if there are a couple of challenges to be overcome.

However, it would be the research and development of the best tool that would become the game changer in this new system of financial transactions. 

FAQs About Decentralized Finance (DeFi)