This article will take us through a short journey of understanding basically and as simple as possible what Decentralized Finance (DeFi) is all about. In this article, I will be mostly using the acronym “DeFi” to represent Decentralized Finance. With the recent buzz and global interest in blockchain technology and its use cases, it is of no surprise that a part of that global interest and attention has also been extended to DeFi. Defi is one of the real-life applications of blockchain technology.
What is Decentralized Finance (DeFi)?
It is nearly impossible to talk about DeFi without talking about blockchain and Cryptocurrency. In case you do not have basic knowledge of Blockchain and Cryptocurrency, read the article “Blockchain and Cryptocurrency in Simple Terms”.
Decentralized Finance is a blockchain-made possible type of financial service. DeFi eliminates the need and dependency for third parties or intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead makes use of smart contracts executed on public blockchains.
DeFi is heavily reliant on Smart Contracts, Decentralized Applications, popularly known as DApps, and a WEB3 wallet and browser to interact with public blockchains.
A smart contract is a written line of code or computer program that automatically executes all or part of an agreement between party A and party B.
This written line of code and computer programs controls the execution and transactions rendering every operation that takes place trackable, visible to the public, and also irreversible.
Decentralized Applications (DApps)
Decentralized Applications or DApps are computer apps written with smart contracts and built to operate on blockchains.
As we all know applications need to run the operating system to function but in the case of DApps, public blockchains are the operating system, as it provides the infrastructure for DApps to operate.
Decentralized Apps are in no way different from regular applications except for the fact that they are decentralized just as the name implies.
WEB3 Wallet and Browser
A WEB3 wallet is a self custody wallet that enables access to the 3rd generation of the web including the usage of DApps.
WEB3 wallets are apps equipped with a WEB3 browser to interact with blockchain with the added functionality of a self custody crypto wallet that provides a safe haven to store your crypto assets. Trust wallet and MetaMask are the most popular WEB3 wallets in use.
In most of these WEB3 wallets, you will find a section dedicated to access DApps via a DAppS browser.
Do we need DeFi?
There are numerous reasons why the world needs a new financial system asides from taking power from centralized authorities like governments and traditional financial institutions to the hands of the masses.
Below are some reasons why DeFi makes sense
• DeFi is presenting the world with a new way to operate financial systems.
• DeFi is opening an investment opportunity for a vast majority of people who had previously been excluded from investing in financial markets.
•DeFi creates an opportunity to make financial opportunities more accessible to the underserved and unbanked. For example, in places with poor governance and authoritarianism, users can divest to the DeFi system to protect their wealth and access better financial services.
• Additionally, decentralized finance removes costly intermediaries to make remittances services more available for the global population.
All the reasons above have been validated by the adoption rate DeFi has experienced in the last one year. There has been a massive influx of not just adoption but also capitals into the DeFi ecosystem within the last year to date.
As at September 2021 the Total Value of Funds locked in DeFi pools exceeded $80 billion, almost thrice the value locked as of December 2020.
Applications of Decentralized Finance Protocols
DeFi Protocols can be applied to almost any Financial service that are currently being offered by traditional financial institutions. By DeFi Protocols we mean platforms that make it possible to access DeFi services.
At the moment, the top 3 most important applications of DeFi are:
• Creating monetary banking services (e.g., issuance of Crypto tokens – Stablecoins). DeFi protocols have made it possible to issue Stablecoins which digital
• Providing peer-to-peer or pooled lending and borrowing platforms
• Enabling advanced financial instruments such as:
Decentralized Exchange(DEX) and Tokenization platforms amongst others.
Top 5 DeFi Stablecoins Protocols
• Maker’s Dai(DAI)
• USD Coin(USDC)
• Pacos Standard (PAX)
• Trues USD(TUSD)
Top 5 DeFi Lending and Borrowing Protocols
Decentralized Exchange(DEX) platforms
DEX is a Decentralized peer-to-peer crypto Exchange. It usually exists as a DApp.
Below are top 5 DEX Platforms:
DeFi Tokenization Platforms
DeFi tokenization platforms are the ones responsible for the issuance of tokens, i.e. both Fungible and Non-fungible tokens popularly known as NFT’s.
5 DeFi Tokenization Platforms
• Open Sea
As we already know there’s is nothing that has an advantage without its own disadvantage, the DeFi ecosystem is not exempted.
Although the DeFi ecosystem is still very young, we are right to say DeFi is still in its Infant stage. Despite the fact that it’s still very early there have been a lot of positives some of which have already been discussed in this write-up.
However, this doesn’t mean the DeFi ecosystem does not have its bad sides. To know more about the advantages and disadvantages of DeFi, you can read the article ‘Advantages and Disadvantages of DeFi‘.