Making rounds on the internet, more rapidly now than ever, is one term that catches the fancy of the crypto community. Defi or decentralized finance is a term that signifies quite a turning point in the world of finance and how money works.
Traditional finance works on some norms and regulations. For example, in the USA, the Federal Reserve and Securities and Exchange Commission has the power to regulate financial institutions. In the European Union, the European Central Bank is a central bank responsible for monetary policy changes. DeFi seeks to challenge this de facto centralization of the financial system. A DeFi system relies on peer-to-peer digital exchanges, meaning the power lies with individuals and not with authority.
What is DeFi?
Decentralized finance, or DeFi is a combination of financial acumen and technology based on digital ledgers. It basically refers to financial services provided by blockchains, largely led at the moment by Ethereum. On a DeFi system, you can carry out all the banking activities as in your regulated banks. You get to make investments, buy insurance, trade derivatives, exchange assets, and more. It is faster than any other banking solution we know currently and doesn’t involve hefty paperwork or even a third party. DeFi is truly global, because it is available the world over with no extra associated costs. It is peer-to-peer, pseudonymous, and available to anyone, just like crypto.
Since the system relies on no central authority, there are no middlemen, and no additional costs. It also gives you more control and transparency over your money. Anyone with an internet connection can access DeFi products and services.
At the core of it, the DeFi branch of crypto is working towards building a new financial infrastructure for the internet age. The crypto community is building its own version of Wall Street, which is largely decentralized and deals exclusively in crypto and related products.
What Are the Benefits of the DeFi Ecosystem?
The DeFi ecosystem, in its essence, provides many benefits to the users in terms of freedom from heavy transactional fees, complete ownership, diversity of options, and the elimination of middlemen. It is also a future-proof financial solution for the coming age of absolute digitalization. Even though DeFi seems to be a difficult topic to understand at first, it is picking everyone’s interest, from celebrities to developers, because of its scalability and future implications. Creating an infrastructure for using cryptocurrencies is an essential task before cryptocurrencies become a common norm. And this is exactly what the DeFi system seeks to do.
Differences between DeFi and Traditional Finance
As mentioned before, DeFi has benefits over the traditional financial system. In a DeFi-based banking atmosphere, your money is completely under your control. In traditional financial institutions, your money is handled by central authorities or banks. Payments made via bank transfers are also usually costlier than DeFi crypto payments. DeFi also allows you to relocate your assets anywhere at any moment without a great amount of paperwork and authorization.
How Does DeFi Work?
In today’s world, financial institutions are key players in anything about money. Not everyone has access to banking systems, especially in developing or underdeveloped nations. Even in 2020, nearly 2 billion people remain ‘unbanked’ according to the World Economic Forum, mostly in high-growth emerging markets. The cause is also a lack of banking infrastructure or the reach of the traditional financial system, often because of the challenges of serving less profitable customers with lower incomes.
With the DeFi system, as said earlier, all you need is an internet connection. It works on fair and universal principles. A smart contract replaces the financial institution in the transaction. A smart contract can hold, send or refund funds based on predefined conditions. It is very safe, as no one can alter that smart contract when it’s live; it will always run as programmed. These contracts are public, which means anyone can inspect and audit them.
In a nutshell, DeFi can be thought of in four layers:
- The blockchain: Usually Ethereum, Solana, Cardano, and other top networks that are preferred by developers.
- The assets: These are the tokens and cryptocurrencies that are minted on the blockchain. They are built into the blockchain by a shared ledger. Examples are ETH, SOL, etc.
- The protocols: Protocols are carriers or transaction mechanisms. Smart contracts are the main protocol in DeFi. They provide the functionality, for example, a service that allows for decentralized lending of assets based on smart contracts.
- The applications: The front end of the procedure is the application that can be used to manage and access protocols or transactions.
What Are DeFi Assets?
DeFi assets are coins or tokens that transfer value in a financial transaction, just like fiat currencies do. These coins are built on blockchain networks and are also named after them. For example, Ether is the native coin of Ethereum. There are also Uniswap, Aave, Chainklink, Solana, etc., which are quite popular.
DeFi crypto tokens are also notable for storing and transferring value. But they are a bit different in terms of representation. Depending on the function, tokens can have different values.
Utility tokens can be used like passwords to provide access to a resource. For example, Brave’s Basic Attention Token (BAT) can only be used to tip content creators. BAT has no other use beyond speculating on its value. Similarly, asset-backed tokens can be used to represent physical assets such as real estate, farm crops etc.
We are all aware of the boom of non-fungible tokens (NFTs). These are also DeFi tokens that represent unique or one-of-a-kind “items” such as digital art.
Top Ten DeFi Coins
At the time of writing, the following DeFi crypto coins top the list by market cap. Dai is a stable, decentralized currency. Avalanche is the native coin of the Avalanche blockchain, which claims to be a blazingly fast and eco-friendly building network. Another notable coin in the list is Uniswap coin, a native coin of the popular dApps ecosystem by the same name.
How Are NFTs Transforming DeFi?
NFTs, or Non-Fungible Tokens have taken off to an exponential level in recent years. Especially over 2021 and 2022, everything with an artistic value has most likely been converted into an NFT too.
Have a look at the numbers of all-time sales from nonfungible.com in the image below. It clearly shows how the age of NFTs is just arriving and catching on exponentially.
When the NFT trend began, there were many apprehensions and suspicions regarding the usability of NFTs. It is a common myth that NFTs are only useful for buying and selling digital media. However, it is important to understand the underlying mechanisms on which an NFT works.
NFTs come with a Smart Contract that records the token’s transactional history, its original minting history, and its current estimated value. The last of these attributes are relevant to the application of NFTs in DeFi.
NFTs can serve many purposes in a decentralized financial system. Some of them are the following:
- Collateral for DeFi loans
- A record of property ownership
- A form of payment for goods or services
- Rewarding royalties or fees to artists or content creators
It is exciting to witness the growth of a decentralized economy that is based on true financial freedom. DeFi apps and NFTs, the most popular of the asset bunch, have many use cases. They will grow further in the future if the current interest and development acumen continues. One thing is clear: this is the best time to make your DeFi investments and jump into the exciting world of NFTs and dApps while also making future-proof profits. As they say, the early bird catches the worm. Discover crypto coins on CoinField and make your first trade now.