What is Decentralised Finance? DeFi market explained

June 14, 2021

What is DeFi?

In short, DeFi refers to Decentralised Finance; peer to peer financial services on a public decentralised blockchain network (particularly Ethereum).

DeFi applications are built on Ethereum blockchain’s – running smart contracts that when conditions are met.

What exactly is DeFi?

It is a unique way to execute financial transactions in the domain of cryptocurrency and blockchain using financial applications – in a way free from a centralised authority or entity.

DeFi stands in to help build financial products and applications on the Ethereum blockchain to allow absolutely anyone, anywhere with internet access to acquire lending and borrowing services on the blockchain without intermediaries. This is why it’s hailed as a platform to enable complete financial freedom.

DeFi limits the barrier of entry to financial services for over 1.7 billion people who are currently unbanked and not involved in traditional financial services for a number of reasons from a lack of credit history to weak banking infrastructure.

What is so special about DeFi?

As a system that allows buyers, sellers, borrowers, or lenders to work together through peer-to-peer technology, access to financial products or financial services is enabled; bypassing middlemen such as financial institutions. Basically, the magic behind DeFi is in the disempowering of the centralised traditional banking system. This empowers people through peer-to-peer exchanges and enables finance for everyone.

Why do we need DeFi?

In the short of it, DeFi has the potential to create more transparent financial markets that are accessible to anyone with internet connectivity worldwide therefore we need it.

DeFi empowered by dApps uses Ethereum-based code that removes the middleman between transacting parties in a crypto-financial transaction.

The two popular concepts link to DeFi:

  • Yield farming

Yield farming is a process that allows crypto holders to stake or lock up their funds with DeFi platforms to provide liquidity to the pool and earn high rewards in returns.

  • Money legos

DeFi revolves around the concept of money legos: The idea that anyone can build a new financial product on top of an existing DeFi product.

Besides this, there are major types of DeFi applications that are being used in platforms and functions such as decentralised exchanges, e-wallets, stablecoins, NFTs, and flash loans.

What are the use cases of decentralized Finances?

Three key use cases of Decentralized Finance are mentioned below:

  • DeFi lending platforms

DeFi lending platforms are collateral-based that connect lenders and borrowers of cryptocurrencies such as Compound that allows users to lend loans or borrow cryptocurrencies.

The platform sets interest rates algorithmically & lenders receive higher interest rates when the demand to borrow crypto increases.

  • Stablecoins

As mentioned, stablecoins are a form of DeFi – a current opening up the financial industry without a central authority. Stablecoins are pegged to dollars or Euros to avoid price fluctuations in cryptocurrencies. Stablecoins bring price stability in DeFi markets making them highly desirable in lending, borrowing, and trading.

  • Margin and leverage

DeFi markets allow users to borrow cryptocurrencies on margin using other digital assets as collateral. Smart contracts are programmed in such a way that leverage Defi protocols to maximise high returns on lending crypto assets.

Total locked value in DeFi

The DeFi market is growing rapidly for a relatively new industry. Right now, the total value locked in different DeFi protocols is around $61 billion as of June 14, 2021. At its peak, it managed to get to a peak of $86.19 billion on May 12, 2021.

Where DeFi might go

The scope of DeFi apps is far-reaching, The DeFi market has been emerging fast, total locked value in DeFi protocols signals the skyrocketed move in the future. As it stands, DeFi still has a lot more potential to tap into but is being widely adopted by eagle-eyed investors to make larger returns on capital.