The advent of cryptocurrencies has turned the traditional financial market upside down. Blockchains paired with cryptocurrency have opened a new, radical vision of the future that big tech and everyday consumers are investing in. One umbrella term that has emerged in this context is decentralized finance or DeFi — a futuristic vision of the financial world consisting of public, secure, peer-to-peer, and near-instantaneous transactions.
DeFi is a broad term covering emerging financial products, instruments, and services not tied to traditional governing authorities like banks, exchanges, and brokerages. DeFi runs on secure, distributed public ledgers leveraging blockchain technology and smart contracts.
No regulatory oversight in DeFi allows users and organizations to make financial transactions in real-time. Since DeFi is peer-to-peer (directly between two users without any routing via a centralized system), decentralized finance companies are commonly global while offering typical financial services like lending, insurance, trading, earning interest, and investing. Cryptocurrency is one of the most recent examples of decentralized financial systems.
While the services offered by DeFi systems are similar to those of traditional, centralized financial systems, there are areas where they are fundamentally different.
DeFi is based on the same technology that drives cryptocurrencies, the public blockchain. A blockchain is a list of distributed and secure ledgers containing transactional data.
Blockchain is comprised of data blocks that have transactions recorded in them. These blocks are chained together to form a complete ledger. The peer-to-peer, public nature of blockchain means anyone can access the blocks, but only verified users can validate the transactions. Once the transactions in a block are verified, it is closed and encrypted. A block’s information cannot be altered without changing the entire chain of corresponding connected blocks that house the same data. This makes modifying blockchains impossible, further enhancing security,
Applications that handle transactions and run the blockchain are called decentralized applications or DApps . DApps leverage peer-to-peer financial transactions, which means two users can directly exchange currencies for goods or services without third-party systems or authorities. Most DApps in DeFi utilize the Ethereum network.
Ethereum is the world’s second-largest cryptocurrency in market share after Bitcoin, with a market cap of 27 Trillion dollars (19.19% of the total crypto market) at the time of writing. Ethereum blockchains drive around 70% of DeFi’s entire infrastructure, as ether tokens are the preferred dApp currency. There are a few reasons for this.
DeFi allows consumers to leverage all centralized financial activities, including:
DeFi trends are shifting how the world thinks about money and financial institutions. As blockchain-based concepts like the metaverse and Web3 come to fruition, DeFi and DApps will continue to evolve from proof of concept to proof of stake. Ultimately, the success of DeFi will depend on the long-term reliability and adoption of blockchains. Overall, the battle between centralized finance and DeFi should benefit consumers, as it will create more avenues for investing, trading, and saving for users.
Need help navigating your AI journey?
Download our eBook for insights and tips to ease your way into adopting AI for your business – the smart and practical way!
Need help navigating your AI journey?
Download our eBook for insights and tips to ease your way into adopting AI for your business – the smart and practical way!