Cryptocurrency has been trending for years now, especially in the past decade. It is what made money transfers accessible on a universal level, regardless of where people are. If you take a cryptocurrency a step further, you get DeFi – the so-called decentralized or open finance movement.
Just imagine this – an open, global alternative to any and every service you use for financial purposes nowadays. Whether it is savings, trading, loans, or insurance – DeFi makes it accessible to all with an Internet connection and a smart device.
According to technology at the most used UK assignment help company, DeFi is one of the most frequently selected topics by students who study cryptocurrency. This shows how brilliant the idea is and how popular it has become since the start.
But, before we go into how hot the topic of DeFi is in the crypto space, let’s see what the term encompasses.
The Story behind DeFi
A paper published by a renowned paper writing service has explored the economic landscape and how De-Fi falls into the equation. The reality is that the finance market is traditionally centralized. The regular currency across the world drives the economy and is used for trades within banks and governments. This leaves the power to regulate and manage the currencies to the banks and governments, not to mention the control they have over people’s assets.
So, what is the problem here?
The problem is that, when the fund and control are centralized, the center is at high risk. There are many risks that come with it. Central bodies make constant human errors and errors in judgement. For example, the Venezuelan government painted a big amount of money attempting to tackle financial crises, which resulted in huge inflation of over 1 million percent. It’s basically what destroyed the entire economic balance within the country.
Only a minor fraction of the profit organizations gain by investing our money is returned to us. This is why more and more people have decided to invest in alternative solutions such as stocks and blockchain.
You are probably thinking – aren’t all crypto coins and currencies decentralizing? Well, the crypto coins offer secure trading without the need of banks and other intermediaries, therefore giving you complete control over your assets. But, they haven’t decentralized the financial system. They’ve only done this to the issuing and storage of money.
A couple of things prevent the cryptocurrency world from making the system decentralized. Most of these are managed through companies that are centralized. And of course, even decentralized cryptocurrencies are accessed via exchanges, which are basically centralized access points.
This is where DeFi comes and introduces the solution of decentralizing.
So, What is DeFi?
DeFi includes the smart contracts, digital assets and protocols, as well as dApps that are built on a blockchain. The primary choice for the application of DeFi is the Ethereum platform, but this doesn’t make it the only blockchain platform.
Simply put, DeFi is an open financial ecosystem with a decentralized approach. You can use it to build a variety of small services and financial tools on a particular blockchain. You can use the blockchain to modify them, combine them, or integrate them based on your preferences and needs.
One of the companies has described DeFi with one word – LEGOS. This comparison is quite fitting considering how flexible the idea is. DeFi offers people what they’ve been striving to get for decades, which is full control over their assets.
Many banks attempt to offer this to their customers, but still, the ways of their workings don’t allow for such flexibility. You still have to put your trust in them to manage your assets. The idea behind DeFi is to give the person full control over their funds. The thing that makes this possible is blockchain and decentralization.
Thanks to DeFi, people can now invest, store, or trade their assets securely in the blockchain. Their return is much higher considering that they aren’t using the traditional systems like banks with their HR software or other intermediaries. Without intermediaries to take a big piece of the return, you get bigger wins and full control over your assets, as well as your investments.
Explaining the DeFi System
All features and products involved in the DeFi system are referred to as open finance. This is because DeFi is an ecosystem, a place where digital assets and blockchains are integrated with the financial structures that are conventional and traditional.
Some of the DeFi products include:
- Open Lending Protocols
Open Lending Protocols is a platform for digital money lending. It’s built on a blockchain technology and is really popular in the open finance sector right now. Users of this product deposit their assets just like at a bank. When a person decides to borrow those assets, the user earns interest.
We are talking about big interest here considering that there aren’t intermediaries to take over the bigger part of it. This product works with the help of smart contracts that dictate the terms of the loan, connect borrowers with lenders, and take care of the distribution of the interest. In such cases, the lender understands the risks, but earns a much higher return.
- Decentralized Exchanges
Centralized exchanges such as Coinbase make it possible for two parties to exchange digital assets without the involvement of third parties. There are no sign-ups with this process, no withdrawal fees, and no identity verification. It is an open marketplace that has been created in recent years.
Decentralized exchanges or DEXs are still in the early process of adoption and their user interfaces are still limited and not so optimized. Even so, this has already proven itself to be a highly innovative method that is resulting in a big interest in the blockchain and cryptocurrency world.
The DEXs idea has progressed a lot in a short time. New innovative methods are used for its improvement and progress, such as swapping crypto tokens through an atomic swap and other methods for exchanging in a non-custodial way with minimal risk or settlement time.
Stablecoins are crypto coins, but not your ordinary type of coins. These are blockchain-issued coins in the form of tokens that you can use to hold onto a specific value. You can use them by pegging them with currencies like the dollar or assets like gold. Stablecoins can be flat-collateralized, non-collateralized, and crypto-collateralized.
- Invest Management and Issuance Platforms
This is a broad category with many issuance platforms joining the security token market frequently. The platform includes exchanges that act like issuance mediums such as tZERO from Overstock.
The two popular platforms are Harbor and Polymath, the places for security token issuance that provide the much-needed tools, framework, and resources to launch securities to any issuers on a blockchain. In terms of the price feed and exchange or risk management integration, there are platforms like Melonport to offer digital asset management.
Possible Risks with DeFi
There are risks with all high return products, but the offers with this one are exceptionally tempting. To handle cryptocurrencies securely, specialized and high knowledge is needed. There is, of course, a risk factor involved with DeFi. This is why it is your responsibility to keep your holdings and your key secret, and implement methods that ensure your privacy such as multi-factor authentication and hardware wallet.
Ever since the incident with the DAO hack in 2016 happened, the Ethereum community joined forces with the Smart contract security and became significantly stronger. But, you should definitely not take this for granted. Thankfully, there are companies that develop insurance that cover such issues, while some DeFi tools have already gone through several security audits.
To keep yourself safe, you need to keep track of the terms of services between DeFi wallets, products, crypto projects, and exchanges. Very often, DeFi products implement new dimensions that govern the platform or the protocol.
The idea behind DeFi is brilliant and the fact that they’ve found a way to decentralize money transactions is getting more popular with every passing minute. Even though DeFi is still rather minuscule compared to the traditional finance systems, it is growing faster than any other part of blockchain technology. As new projects and dApps pop on the market all the time, we can expect a much improved, genuinely decentralized reality in the future where you can take full control over your assets and collect big returns with minimal risks. Even now, the DeFi system is interoperating with blockchain and digital assets in amazing sync.