Have you ever heard of decentralized finance (or DeFi)? This universe has made a lot of noise in the crypto sphere. Some see it as a utopia where it is possible to multiply your earnings without the slightest effort, in reality it is a bit more complicated… Today we will detail what DeFi is and show its applications.
What is DeFi and what does it mean?
DeFi – Decentralized Finance – is a new movement, heavily based on the cryptocurrency world, that aims to have traditional banking services without the intermediation of the bank-controlled financial system. To a large extent, this system relies on cryptocurrencies and blockchains supporting smart contracts.
There are already many applications in the DeFi space, ranging from digitized asset trading to tokenization and automated lending. The industry is still in the most primordial stages of development, and talking about the future possibilities of this sector today is almost science fiction, as what we see in the market nowadays was inconceivable only a few months ago.
It is a sector with enormous potential, in which we can find tokens and projects that are very different from each other, with a common point: replicating the services provided by banks, trades and stock exchanges without intermediaries: all based on the power of blockchain and smart contracts.
DeFi’s practical cases
There are multiple use cases of DeFi, each more incredible than the other.
Want to take out a crypto loan in under 10 minutes? It’s possible. Do you also want to exchange your bitcoin for ether without going through a centralized exchange platform? That’s possible too. In short, we’re going to introduce you to 3 of the most common cases in decentralized finance.
1. Lending your cryptos to earn interest
The first applications of decentralized finance to emerge are lending services. What is lending? It is the fact of being able to lend one’s cryptocurrencies directly to other users in exchange for interest. The main issue with this type of service is being able to grow your cryptocurrencies directly through the blockchain, as the lenders’ funds are locked in a smart contract and not through a third-party organization.
Compound was one of the first organizations to offer this type of service with MakerDAO. Today, there are others like Dharma or Celsius.
2. Exchange your cryptocurrencies without going through a centralized exchange platform
As we have seen above, one of the main issues of DeFi is decentralization. Thanks to DEXs (decentralized exchange platforms that run on the blockchain), it is possible to exchange your cryptocurrencies without having to go through a third-party organization that holds your funds.
Today, the most widely used DEX is Uniswap. It is based on the Ethereum blockchain. However there are DEXs based on other blockchains like JustSwap, on the TRON blockchain.
The main advantage of decentralized exchange platforms is that you don’t have to transmit any personal information (KYC). You just need to connect your crypto wallet (metamask or ledger for example) to the platform to start trading your tokens.
3. Take out a cryptocurrency loan
Borrowing cryptocurrencies is one of the possible uses in DeFi. By providing collateral (a blocked amount of cryptocurrency acting as collateral), any user can take out a crypto loan. This service goes hand in hand with lending because the amounts borrowed are drawn from the lenders’ funds. Thus, borrowers pay interest, which is redistributed to lenders as a reward.
There are obviously other applications to decentralized finance. The purpose here was to present some of the most important ones.
Decentralized finance is now an integral part of the cryptocurrency world. Its uses are multiplying and its number of users is only increasing. We are just at the beginning of a decentralized era, where users interact with each other, without the help of a trusted third party.