30 Sep What is DeFi and what is the buzz all about?
This post is also available in: Español
DeFi is short for Decentralized Finance, a term under which a variety of financial applications fall that are using blockchain technology aiming at disrupting the traditional financial industry while making financial services open to anyone with a smartphone or internet. DeFi applications include credit and lending services, decentralized exchanges, custodial services and more. In a way, it is basically the merger of traditional banking services with decentralized technologies to make the financial service ecosystem more transparent, permissionless and less fragile.
What are the Use Cases for DeFi?
DeFi is much more than an emerging ecosystem of projects, it’s building a parallel financial system that rivals the traditional centralized financial industry, being more accessible, efficient, transparent and trustless. That’s why there is a big variety of Use Cases within the DeFi field, such as:
- Lending and Borrowing
DeFi lending protocols have become quite popular in the Open Finance ecosystem in the past year. Lending protocols allow you to lend your crypto out and earn interest on it. These protocols are collateral-based, meaning that if you want to take out a loan, you’ll have to put up a collateral, often cryptocurrencies such as Ether. These protocols automatically match borrowers and lenders and adjust interest rates dynamically based on supply and demand. The users don’t have to give out a credit score, neither in some cases their identity.
- Asset Management
DeFi protocols allow you to be the custodian of your own assets. Wallets like MetaMask allow you to easily interact with decentralized applications, while you own your data.
- Decentralized Exchanges and Automated Token Exchanges
Decentralized Exchanges, or DeX, are another interesting use case of DeFi. These exchanges operate without a central authority, which means that its users can transact peer-to-peer and have control of their funds. The assets are never in custody of the exchange itself.
- Prediction Markets
Platforms such as Augur are prediction markets that offer a view into a future by tapping into the wisdom of the crowd.
Stablecoins are another interesting use case of DeFi that has widely spread and used within the crypto scene. These coins are pegged to the value of a particular currency or commodity. For example, DAI and USDC are both pegged to the US dollar.
- Monatery Banking Services
These can include the issuance of stablecoins, mortgages, and insurance.
What makes DeFi applications different from traditional banking services?
- No need for any intermediaries or arbitrators
The operations of DeFi applications are not managed by an institution and its employees, the overall rules are written in smart contracts. Once these smart contracts are deployed, DeFi applications can run themselves with little to no intervention from humans. The code also specifies the resolution of possible disputes, while the users maintain control over their funds at all times. Next to that, taking away the human gatekeepers can improve the speed and sophistication of transactions while offering users direct control over their digital assets.
- Global access and democratization of banking services
The services of DeFi applications are designed to be global and don’t know geographical restrictions. The open ecosystem gives access to individuals who might not have access to traditional financial services, As of 2017, 1.7 billion adults worldwide remain unbanked, according to Global Findex, a group that can drastically benefit from DeFi applications.
- Permissionless to participate and to create
Anyone can create and use DeFi apps, unlike traditional financial services that have gatekeepers, strict regulation and rules such as credit score.