An Introduction to DeFi

Let’s take a moment to think. Is transferring value up and down the only use we have for money? You know the goal of Bitcoin is to make peer-to-peer transactions possible without the need for any third-party intermediaries.

Let’s not be self-indulgent. If this were true, intermediaries like PayPal and the entire banking industry would see their business models crumble. After all, they take care of things like loans, insurance, underwriting, derivatives, and much more.

However, this all comes at a price. Blockchain enthusiasts do not like the centralization that is inherent in these parties. The centralized nature strangles the system, and makes it inefficient and non-inclusive.

Enter decentralized finance.

What is DeFi?

As cryptocurrencies aim to make transactions independent of any central authority, DeFi applications intend to make other complex financial tasks independent of the centralized institutions.

Most DeFi applications are based on the Ethereum network, and offer the following solutions:

  1. Decentralized Exchanges (DEXes): Even in cryptocurrencies, the users have to trust their funds to an intermediary, a crypto exchange. Decentralized exchanges take the decentralization even further as you keep the ownership of the money, making the trade genuinely peer-to-peer.
  1. Stablecoins: The volatility of the crypto markets has discouraged people from joining the revolution. A Stablecoin is a form of DeFi, that has its value tied to an asset outside of the crypto environment. There are no wild price fluctuations, hence the name.
  1. Lending Platforms: Imagine your friend Bob needs money. You do not want to lend him because he doesn’t keep promises. For some reason, he doesn’t want to go to a bank either. In such a case, he can go to a DeFi lending platform, which takes a crypto token as collateral. Such platforms connect lenders to borrowers and generate self-executing smart contracts that do not need a bank/intermediary to manage.
  1. Wrapped Bitcoins (wBTC): Wrapped Bitcoins are a way for Bitcoin owners to take advantage of Ethereum’s DeFi ecosystem. It lets them earn interest by lending bitcoins via DeFi lending platforms.
  1. Prediction Markets: People bet all the time because they love to predict the future, and it’s easy to cash if they win. They bet about a football game, a presidential election, and stuff like that. DeFi prediction markets are for the same purpose, just without the presence of any intermediary. Smart Contracts distribute assets as and when the betting conditions are met.

Conclusion

A lot of innovative startups have started blooming through the creative application of DeFi. But as a revolution, it is still in its infancy and would need a few years to reach its full potential. In the meantime, the only thing to do is more innovation and trust-building.


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