Decentralized Finance Protocol (DeFi): What are they really?
Since 2019/2020, the term Decentralized Finance (DeFi) has crept into the Cryptocurrency space with many questioning what it is even till now. Just like many other trends in cryptocurrency, DeFi came with lots of enthusiasm for how decentralized finance will change traditional finance institutions.
Defi is short Decentralized Finance which is a general term for several finance applications in the Cryptocurrency and blockchain space with the sole aim of disrupting finance intermediaries. Defi isn’t controlled by anyone thus allowing users full control of their assets.
The key advantage of Decentralized Finance (DeFi) is eliminating the presence of middlemen or financial intermediaries in the course of conducting a transaction and this makes for cheaper and seamless transfer of digital assets among users.
Several Defi applications are built on the Ethereum blockchain as it’s easier to build different types of decentralized applications there. One may begin to wonder why build on Ethereum? What about other Digital assets?… Well, the answer is not far fetched because Ethereum uses a smart contract that enables it to automatically execute transactions without the need for an intermediary. It’s important to note that smart contracts are made possible by blockchain which is a network of interconnected computers working together to enforce rules without the help of any intermediary.
Furthermore, some analysts have expressed concerns regarding the scalability issues of Ethereum but we firmly believe Ethereum 2.0 will take care of these concerns and give the Dapps built on Ethereum blockchain much needed to boost yo function properly.
Types of Decentralized finance
There are several available types of Defi in the Cryptocurrency space.
1. Decentralized Exchanges: it’s safe to say this is the hottest among them all as it allows it’s users easy access to exchange one digital asset to another without registration, KYC or any other bottleneck associated with centralized exchanges. There is no intermediary here
2. Lending Platforms: This sort of Dapp aims to replace the traditional banking we know, it uses smart contracts to replace intermediaries like banks when it comes to lending digital assets.
3. Wrapped Bitcoin: This is simply sending bitcoin to the Ethereum network such that the Bitcoin can be used on Ethereum’s Defi ecosystem. It allows users to earn interest on the bitcoin they lend out via the decentralized lending platforms described above.
4. Yield Farming: This involves having your tokens of choice locked for yield benefits in the form of the same assets or a different token, This is a huge way to improve the liquidity of any given token as well as reduce available supply this pushing prices up.
5. Stable coins: These are digital assets tied to conventional Monroe’s we know about in order to stabilize the price. Examples, TUSD, BUSD, HUSD etc.
Notably, several Defi projects entice users to join their platform by offering them free tokens when they provide liquidity to their platform.
Generally, the Defi craze is still very much around and will obviously stand the test of time as the technology continues to evolve even with its present challenges of getting attacked from time to time, let’s remember we all have a duty to stay safe while using any Defi protocol.
Want to know how to stay safe while using DeFi?. Watch out for our next article about that.
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