A group of systems and applications known as “decentralized finance” (DeFi) were developed by programmers to enable a variety of financial operations on the blockchain within the cryptocurrency ecosystem.
What is DeFi?
DeFi, or decentralized finance, is often referred to as the financial backbone of the bitcoin industry. The DeFi ecosystem will eventually be developed to the point where it can compete with conventional banking practices, according to bitcoin proponents.
DeFi still has a long way to go before it can completely upend the multi-trillion dollar global banking business. The DeFi market, however, rapidly reached $50 billion and, by some measures, exceeded $100 billion in 2021, as judged by the total value locked in contracts. The previous several years have seen significant growth for DeFi.
What is bringing in so much money to the DeFi market? Decentralized finance, to put it simply, seeks to develop many of the same features as conventional banking, but with certain advantages. Cryptocurrency,
The Purpose Of Defi
It is necessary to distinguish between DeFi Apps ((DApps)) and the underlying coin. There are the actual cryptocurrencies or tokens themselves, such as Ethereum (ETH-USD), Cardano, and Solana, among others (ADA-USD).
On top of these already-existing blockchains, developers build DApps. Initially, a lot of DeFi innovation was housed on the Ethereum chain since it was well-known and accepted. Uniswap is a well-known Ethereum-based DApp that lets users buy or trade a variety of lesser-known currencies.
Developers have lately started researching at alternatives like Solana, Cardano, and numerous other competing protocols, meanwhile, because to the high transaction fees for Ethereum.
Not all DApps, though, are just brokerages. More people are using DeFi applications to lend or borrow money and to build
DeFi Apps or Platforms
The difference between DeFi Apps ((DApps)) and the underlying cryptocurrency must be made. There are the actual cryptocurrency currencies or tokens themselves, such as Cardano, Solana, and Ethereum (ETH-USD), among others (ADA-USD).
DApps are constructed by developers on top of these already-existing blockchains. Since it was well-known and approved, the Ethereum chain initially hosted a lot of DeFi innovation. One prominent Ethereum-based DApp that enables users to purchase or sell a wide range of lesser-known coins is Uniswap.
However, because to high transaction costs for Ethereum, developers have recently begun looking towards alternatives like Solana, Cardano, and several more competing protocols.
However, not all DApps are only brokerages. DeFi apps are being used more often to lend or borrow money and to construct
DeFi Protocols or Smart Contracts
The following are the top 10 protocols, as determined by total value locked (TVL), as of November 15, 2021, according to statistics from Statista:
- Curve (CRV-USD)
- MakerDao (MKR-USD)
- AAVE (AAVE-USD)
- Convex Finance
- WBTC (WBTC-USD)
- Compound (COMP-USD)
- Instadapp
- Lido (LDO-USD)
- Uniswap (UNI-USD)
- PancakeSwap (CAKE-USD)
This list is far from exhaustive. Additionally, things may change quickly in the bitcoin world; a project that wasn’t in the top 10 one month can be at the top the next.
Nevertheless, as of November 2021, each of these 10 platforms has a locked-in value of at least $7 billion for PancakeSwap and up to $21 billion for Curve. These are substantial sums of money that will pique institutional investors’ attention and offer genuine liquidity to traders eager to participate in these DeFi marketplaces.
Advantages of DeFi
- Faster Innovation: DeFi platforms can introduce new product categories and ways to settle transactions with no regulation scrutiny.
- Broader Product Types: Platforms were already providing lending, borrowing, trading, insurance, royalty contracts, and logistics management within the first several years of DeFi.
- Easier to Access: DeFi is particularly popular with customers who have had trouble using the conventional banking system. Particularly in emerging economies, DeFi has made it possible for consumers to access financial services that are not otherwise available in the local economy.
- Lower Fees: DeFi transactions may have substantially cheaper fees than those made through conventional banking or payment systems for some transaction categories, such cross-border payments.
- Transparency: Market participants may more easily determine a counterparty’s exposure to an asset and conduct an investigation in the event of a problem now that all transactions are being recorded on a blockchain.
Disadvantages & Risks of Decentralized Finance
- Lack of Regulatory Protection: DeFi has many benefits, but there are also hazards. For instance, the absence of regulators encourages innovation but also makes it impossible for a victim of a DeFi transaction to turn to a third party for help.
- Hard-to-Use Software: Many DeFi platforms are difficult for beginners to grasp and need a substantial understanding of complex computer principles. This can significantly increase the risk for new DeFi users when they attempt to conduct transactions with more experienced counterparties.
- Unrealistic Investment Claims: Due to a lack of regulation, several DeFi initiatives have provided investors with investment returns that appear unattainable or high-yield savings accounts. Be particularly cautious before making an investment if a project is promising start-up profits that are startlingly high.
- Outright Scams: Some DeFi initiatives were created with the intention of taking advantage of users. In the world of cryptocurrencies, this is known as a “rug pull,” in which engineers leave with investors’ money after abandoning a project. Given the absence of regulatory monitoring, handling these instances is difficult for the court system.
- High Volatility: DeFi initiatives may encounter problems as a result of the frequent price fluctuations of significant cryptocurrencies like Ethereum and Bitcoin. Contrarily, banking systems that use fiat money are not required to address this problem.
Advice: One significant distinction between banks and DeFi is regulation. Since DeFi doesn’t have to adhere to mountains of regulatory red tape, many of its benefits are made available. However, there are costs associated with the DeFi’s quicker and more advanced transaction structures.
Bottom Line
Cryptocurrency naysayers have long maintained that there aren’t many practical applications for it in daily life. DeFi plays a significant role in the endeavor to remedy it.
As DeFi gains traction, crypto investors will be able to start collecting interest on their holdings and using their coins and tokens to engage in more intricate long-term contracts.
Given that DeFi is a young market with no regulation, there are several hazards. But in the long run, it’s probably because of DeFi’s growing acceptance that crypto will be successful in upending conventional banking and payment systems.
