What is Decentralized Finance ( DeFi ) ?

Wolfie Zhao
Feb 13, 2020 at 07:13 PM
Updated Feb 15, 2020 at 07:02 PM

DeFi - A term that is making sense in the crypto space in recent days.  As the Financial industry is the one that grows every second, the traditional financial services seem to be harder. 

Thus, Decentralized Finance helps in making a healthier Financial System. 

This is our first article about this "DeFi - Decentralized Finance". Here you can acquire complete knowledge about the DeFi in detail.

Without deferring, let us jump into deep discussion. 

What is DeFi?

The DeFi is a short form of Decentralized Finance (DeFi). This Decentralized Finace or Open Finance is one that includes digital assets, protocols, decentralized applications that are built on blockchain, smart contracts and so on. 

With DeFi, a global with open financial services, ie., saving, loans, insurance, trading and lot with accessibility to anyone in the world with the internet connection on smartphone or desktop. The Ethereum blockchain platform is being the primary choice of all developers for developing DeFi applications with given flexibility and cost of development.

What is DeFi Offering?    

DeFi is the process of offering the control of your own assets on your hands. 

Although we have more control over our assets in the new-age banks and Fintech organizations, still we trust them for managing our funds. The main objective of DeFi system is to provide full control over your assets through the effective use of decentralization and blockchain technology.

Many developers adopt open-source protocols for developing financial apps with trading options through decentralized exchanges. This open-source protocols allows for the collaboration of global developers for the creation of new products which leads to faster innovation with a secured network.

Thus, DeFi aims in offering a blockchain-based decentralized financial system in which anyone can store, trade, and invest their own assets with complete control over assets and no intermediaries to handle investments.

Refer  : Binance Academy

Specialties of DeFi Dapps 

Here let us discuss the answer to the query " What differentiates the DeFi apps from their traditional bank ?" . 

Listed here are some of the benefits of DeFi Dapps over the traditional banking system.

1. Anyone can create and use DeFi apps. DeFi is replacing all the accounts with lengthy forms to easily accessible smart contracts. This allows users to directly interact with their crypto wallets.

Thus DeFi is " Permissionless - To Create and To Participate ".

2. The overall operations of this DeFi apps are not managed by any institution or group of employees. Instead, the rules of DeFi apps are coded in smart contracts which are deployed to a blockchain network. Thus, they can operate with little or no manual work.

DeFi - " Not Managed by any Individual or Institution ".

3. If you are connected to the internet from Texas or Tanzania, the DeFi app services or network that you are accessing will be the same. With the local regulations, dapps are available for all global users.

DeFi Dapp - " Globally designed ".

4. All transaction activity on DeFi is made Public for anyone to view at any time. The code of DeFi is transparent that anyone can understand the functionality, find the bugs and audit the codes.

Thus DeFi is designed with " Transparent Codings ".

5. A new DeFi app can be built with a combination of similar other DeFi products. For example, decentralized exchanges, stablecoins and market predictions all can be combined as a new single DeFi product.

" DeFi is known for its Interoperable ".

6. The smart contracts of DeFi are the same as open API that anyone can build an app, anyone can change the interface and so on.

DeFi - Flexible user experience.

specialties of defi dapps

Popular DeFi dapps

Here let us look at some of the popular DeFi dapps that do various processes. 

1. Compound - Lending and Borrowing app

Compound is a famous blockchain-based DeFi Dapp that allows us to borrow and lend cryptocurrencies. It allows for depositing your cryptos to the Compound's smart contracts as collateral and make a borrow against it. 

The smart contract of Compound matches borrowers and lenders and adjusts the interest rates based on supply/demand automatically.

Dapps Similar to Compound :
Dharma, dYdX, and LoanScan

2. Uniswap - Automated Token Exchange Platform

Uniswap - a crypto exchange platform that runs entirely on smart contracts that let users trade tokens directly from their wallet, unlike Coinbase, which stores cryptos and private keys for safekeeping.

This Uniswap follows an innovative mechanism called " Automated Market Making " to settle trades near the market price automatically. Uniswap offers " Pooling " which allows users to become a liquidity provider by the supply of cryptos.

Dapps Similar to Uniswap :
AirSwap, Bancor, Kyber, IDEX and so on.

3.  Augur - Market Prediction

Augur - A Decentralized Market Prediction Protocol, with which you can vote on the outcomes of the events. It offers a view of the future where users can make better predictions. 

Dapps Similar to Augur :
Guesser

4. Synthetix - Synthetic Assets 

Synthetix is an application that offers users to create and exchange the assets like gold, cryptos, fiat currencies and sliver with synthetic versions backed by some additional collateral locked within the Synthetix contracts.

5. MakerDAO - Stablecoin and Decentralized Reserve Bank

MakerDAO is a stablecoin project in which each stablecoin is pegged to the USD and is backed by the collateral in the form of cryptocurrency.

On the Market Oasis Dapp, you can also try creating your own DAI stablecoin.

How Decentralized Is DeFi Really?

Source : Medium

The degree of decentralization in DeFi service varies since neither each component can be decentralized nor it should be.

Let us categorize the decentralized lending protocols which can be done based on custody, price feeds, provision of margin call liquidity,  protocol development,  initiation of margin calls, and determination of interest rate.

Degree 0 DeFi ( CeFi ) -

Degree 0 DeFi products or centralized finance ( CeFi ) products are custodial which uses price feeds, provision of margin call liquidity,  protocol development,  initiation of margin calls, and determination of interest rate all in a centralized manner.

For Example: Celsius, Nexo

Degree 1 DeFi -

This degree 1 DeFi products are non-custodial but uses centralized price feeds, margin calls, interest rates and updates everything in a centralized manner.

For Example: Dharma

Degree 2 DeFi -

This level 2 DeFi products are also non-custodial but have only one additional decentralized component in the list while the others are centralized in operation.

For Example –  Nuo, ETHLend.

Degree 3 DeFi - 

These products are also non-custodial which have permissionless initiation of margin calls and provision of margin call liquidity with all other components as centralized.

For Example –  Compound,MakerDAO

Degree 4 DeFi -

These DeFi products are also non-custodial and same as like Degree 3 DeFi products with price feeds as decentralized.

For Example –  Fulcrum

Degree 5 DeFi -

All the components except the control for the platform developments and updates are decentralized in the degree 5 DeFi products.

For Example – bZx

Degree 6 DeFi -

All the components of DeFi should be decentralized in this category and but as of now, there is no such DeFi protocol that is fully decentralized.

 

 

Thus until the complete adaptation of DeFi services into law, there will always be some amount of centralization present in the DeFi services.

Is There Any Risk Involved With DeFi?

" Nothing exists without Risk ".

Thus DeFi has its own risks too.

Handling the cryptos, finance tools requires some enhanced knowledge as there involve risk factors.

The DAO hack has occurred in June 2016,  through which hackers managed to transfer 1/3 of DAO funds to another account by making use of the vulnerability in its coding. This forced the restoration of funds by the hard-fork of the ethereum blockchain.

Some of the DeFi tools are gone through the security audits, for example, DAI, has gone for 4 security audit. Thus as a DeFi user, it is our responsibility to keep ourselves updated to the changing terms and conditions of DeFi services.

DeFi - In Future

The origination of DeFi dapps mainly focuses on the collateral as a safeguard, which means one must already own crypto to provide it as collateral for the process of borrowing of more cryptos.

Unlike the traditional borrowing and lending system which is unsecured and rely on the identity system, this decentralized identity is being universal and privacy-preserving.

In the Future, crypto wallets will be the portal for all the digital asset activities as like the internet being a portal for the world’s news and information. We are also experiencing the move towards decentralized governance and also decision making in the DeFi ecosystem.

Thus, DeFi space will build an open financial system and make the entire financial industry to blossom from scratch.

Who We Are?

Bitdeal - Decentralized Finance Solutions 

We, Bitdeal - Noteworthy Blockchain Development Company offers the complete end-to-end blockchain solutions for all startups and enterprises. As an anterior adopter of new trends and technologies, we started providing decentralized finance solutions for our clients all over the globe.

Get an unbeatable Decentralized Finance Solutions from Bitdeal to create a "Decentralized Finance Eco-system". 

Let Us, Hope, for Magical Financial Eco-system by DeFi !!

Stay Connected with Bitdeal to keep yourself updated to new trends and technologies !!

Book a Free Consultation with our experts to know about our Decentralized Finance solutions !!

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