Decentralized Finance (DeFi): Meaning and Insight – 3 Leading projects
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Decentralized Finance (DeFi) is a financial application that works or runs on a blockchain network.
Decentralization in blockchain terms means that information is not stored in a central location. Rather, it is distributed across a different computer network
A large part of human existence revolves around finance. Most of the world’s financial transactions have always been centralized but has been seeing a remarkable diversion in recent times.
With blockchain technology, Decentralized Finance (DeFi) is gradually gaining traction and is becoming a common trend in recent years.
With centralized finance, the world depended on a central authority such as financial institutions (Banks) to control financial transactions.
The banks decided who can get access to loans, lending rates, and gives a little option for the masses.
The financial governance system enriches the system and the main parties who calls the shot.
A revolution started with blockchain technology. It started first with the coming of Bitcoin and subsequently with other altcoins.
For the first time, people can now send money directly to one another without the help of any intermediary.
After the first cryptocurrencies, new use cases have been presented to add value to the blockchain ecosystem.
This has prompted blockchain innovators to boost their determination to transform every aspect of finance with blockchain.
This is what gives birth to Decentralized Finance.
How can Decentralized Finance Make the Difference?
As in a democracy where everyone’s voice matters, the financial system can also benefit from direct control by the people.
Take for instance, you as an individual have about $200 extra cash lying around with you, getting involved in financial services is unthinkable under the centralized financial regime but feasible with DeFi.
Virtually all DeFi applications are built on the Ethereum blockchain, the world’s most popular programmable blockchain.
Ethereum is a blockchain network that maintains a shared ledger of digital value.
Instead of a central authority, the participants that comprise the network control the issuance of ether (ETH), the network’s native cryptocurrency, in a decentralized manner.
Drawing from this feature of the Ethereum network, developers can create applications known as Decentralized Applications (DApp) or Smart Contracts.
These smart contracts have the capability to create, store, and manage digital assets (tokens) on the blockchain.
With the uniqueness of the Ethereum blockchain, financial transactions have been programmed to conform to an agreement the network enforces.
This has brought more transparency in financial dealings as much as it has given more dominance to the people
Through DeFi, unique smart contracts have been created with unique value offerings.
Built as an open-source application, people from anywhere at any time can access the smart contracts and choose the best for each of their specif needs.
This is also possible owing to the interoperability of the Ethereum blockchain.
Key Use Cases of Decentralized Finance
Understanding the concept of Decentralized Finance is a key step in building DeFi applications.
Today, the DeFi ecosystem has unique applications stirring the emergence of Stablecoins, borrowing and lending platforms, and decentralized exchanges.
Stablecoins are digital tokens created to resist crypto volatility
A stablecoin is usually pegged to another asset (majorly fiat currencies) to preserve its value.
While not all stablecoin find uses in a decentralized finance setting, DAI is an exception.
DAI is a stablecoin pegged to USD and backed by ether (ETH). For each DAI, there is $1.50 of ETH locked into the MakerDAO smart contract as collateral.
The aspect of borrowing and lending provides the most direct unique alternative to what is obtainable under centralized settings.
Here, users can borrow cash deposited by other users and the borrower earns interests.
Remember the $200 spare cash analogy? Here is a way DeFi can enable one to put such funds to use with interest.
There are DeFi platforms (DApps) that offer DeFi backed borrowing and lending services. Examples of these platforms are Compound, MakerDAO, Aave etc.
In addition to the applications of decentralized finance is the emergence of decentralized exchanges (DEX).
Decentralized exchanges help to remove a central control in cryptocurrency trading platforms.
With DEX, users can enter into peer-to-peer trading removing any form of a middleman. This helps to cut down the cost of transactions significantly.
Check out our pick of the top Decentralized exchanges (DEX) in 2020: Top 6 DEX in 2020
Profiling Major DeFi Lending Platforms
DeFi Pulse has a profile of 10 of them and the surge in crypto in the past days has impacted DeFi performance figures.
As a reference, we would give a brief summary of three of the most popular of these DeFi lending platforms.
These three MakerDAO, Compound, and Aave and each of these three operates a governance system
MakerDAO is a decentralized lending platform on Ethereum that supports Dai, a stablecoin whose value is pegged to USD.
MakerDAO is the most patronized lending platform with about $1.43 billion assets locked.
This growth is significant as the total assets locked in June is $500 million.
Anyone can lend from MakerDAO using the DAI token, provided they have adequately collateralized the loan amount.
Every user can borrow up to 66% of their collateral’s value with a 13% penalty on defaulters
The platform’s smart contract is unique, a key factor keeping MakerDAO at the top of the ladder
Compound in Brief
Compound is also a lending platform that uses algorithmic money market protocol on Ethereum.
Just like MakerDAO, Compound also enables the borrowing of assets against collateral.
It currently has about $798.4M total assets locked, a figure way below $150 million in June.
Compound has a relatively wide lending capability. It can permit borrowing from 50 to 75% of collateralized tokens.
Operating with the COMP native cryptocurrency, Compound is one of the few verified and audited lending platforms out there
Aave Lending Platform
Aave (translated as Ghost in Finnish) is an open-source non-custodial protocol on Ethereum for decentralized lending and borrowing.
It gained traction owing to the fact that it was launched later than other DeFi lending protocols.
Currently has $542.1 million assets locked and has a robust liquidity reserve to fast track withdrawals at any time. The protocol operates with the LEND token.
Aave offers flash loans trustless, uncollateralized loans where borrowing and repayment must occur in the same transaction.
Aimed at developers, this flash loans feature could lead to innovative uses of DeFi
Decentralized Finance (DeFi) is drawing on the open-source potentials of the Ethereum blockchain to shape the global financial system.
It encompasses the use of smart contracts to bring unique financial services to users.
Decentralized Finance is helping to create more open-source, permissionless financial services in a decentralized system.
DeFi protocols are usually interoperable, affording users the flexibility to interact across several DeFi offerings.
DeFi is finding uses in decentralized exchanges, and in stablecoins which helps the DeFi ecosystem hedge against price fluctuations.
DeFi’s application is also common in lending and borrowing and platforms such as MakerDAO, Compound, and Aave.
Though still new, the concept of Decentralized Finance is attracting more investors particularly those who cherish autonomy.
DeFi’s growth path in the years to come may serve as the nudging fueling the recent growth in the sector
While we at Go CryptoWise will continue to bring more educational pieces to learn more about the core offerings in the blockchain and crypto ecosystem, we want you to check out our guides and reviews to stay ahead of the pack
Benjamin Godfrey is a blockchain enthusiast and journalist who relish writing about the real-life applications of blockchain technology and innovations to drive general acceptance and worldwide integration of the emerging technology.
His desire to educate people about cryptocurrencies inspires his contributions to renowned blockchain-based media and sites. He uses his skills in reporting current trends in the blockchain ecosystem, writing comprehensive and insightful guides, reviews, and opinion articles with the aim of bringing information and a new perspective to readers.
A writer who relishes diversity and thoroughness with about three years of experience in the blockchain and finance ecosystem. Godfrey graduated from the University of Benin where he bagged a First Class (BSc Agric). His future ambition involves helping governments develop policies that will integrate blockchain technology in agriculture as a means to guarantee Food Security. Benjamin Godfrey is a lover of sports