Since the introduction of Bitcoin in 2009, blockchain and cryptocurrency enthusiasts have speculated and theorized furiously on the potential of the new technology to revolutionize finance as we know it.
There have certainly been plenty of skeptics over the years as well – and for some time, the skeptics could point to the fact that while gaining in popularity, blockchain had yet to coalesce into a true alternative infrastructure to the traditional financial system. But at last, the tide is beginning to turn – and the rising movement is known as DeFi, or ‘decentralized finance.’
What is DeFi?
DeFi, put simply, is a catchy portmanteau that summarizes the emerging financial landscape empowered by blockchain. This new ecosystem is made up of countless blockchain-based applications that interact together in a decentralized, trustless and transparent manner. In the DeFi world, users never give up control over their own assets and transactions to an independent third party acting in an opaque manner.
Furthermore, DeFi takes power away from the gatekeepers of the financial industry: anyone with electricity and Internet access can partake to their heart’s content. 2021 so far has been the year of DeFi, with over $52.9B billion USD being moved around the DeFi network, according to DeFi Pulse.
The Importance of dApps
While blockchain came to prominence through its application for cryptocurrencies for use in transactions or as stores of value, DeFi goes far beyond cryptocurrency alone. If you’ve been following the blockchain space, you may have heard of “smart contracts,” which are blockchain-based pieces of software or protocol that exist on the blockchain. Users are connected by smart contracts to decentralized apps, or “dapps”.
Dapps and smart contracts operate on decentralized platforms such as Ethereum, and they can provide any kind of service to members of the DeFi ecosystem – use cases range from ID verification and supply chain management, to escrow services and even gaming or gambling. The brilliance of smart contracts is that they preclude funny business from happening – due to their existence on the blockchain, smart contracts are freely auditable to interested parties.
What can DeFi do for me?
Banking Services – the DeFi network has the potential to provide traditional banking and financial services such as loans, mortgages and insurance. Examples: LEND, COMP.
Decentralized Exchanges – also known as “DEXes,” these allow users to exchange cryptocurrencies without needing to use a third party exchange. Examples: KNC, 0x.
Derivatives – DeFi can provide a huge range and variety of crypto-related derivative products, even allowing individual users to offer their own concoctions based on smart contracts. Examples: SNX, MCDEX.
Stablecoins – the decentralized finance ecosystem can even support decentralized stablecoins, such as DAI – providing the benefits of more popular stablecoins such as USDT, without any of the risks involved in stablecoins that are backed by a third party. Examples: DAI, USDC.
Yield Farming – generate passive income by lending or supplying liquidity to mining pools. Examples: AMPL, YFI.
Is the technology ready for DeFi?
The ever-lurking question about blockchain is whether the decentralized nature of the tech will finally become scalable to support as many users as the traditional infrastructure does. So far, transaction speeds and fees still seem to face challenges – in summer 2020, DeFi users on the ETH blockchain faced record fees as network usage increased, causing congestion. It’s fair to say that the problem of scalability is not yet solved.
User friendliness is also a problem, as it has never been easy to draw in users less familiar and comfortable with modern technology. Education will play a key role in bridging the gap between highly tech-savvy DeFi users and the masses. This is doubly important, because one of the benefits of DeFi – full control over one’s own funds and assets – can also be a drawback if users are not properly educated and trained on how to manage their funds and avoid being scammed or losing funds due to faulty security practices.
But with the massive incentives in place for the first blockchain project to scale, and with the incredible progress already made in the last few years, it’s hard to imagine that the issue of scalability will defeat the DeFi movement.
DeFi on Liquid Exchange
Liquid is proud to play a role in supporting the emerging DeFi movement by listing a number of DeFi-related tokens – most recently, LINK has become available to trade on Liquid, and moving forward we plan to list DeFi tokens every Thursday. Don’t miss the DeFi wave: trade cryptocurrency on Liquid or instantly buy using your bank card with Liquid Buy and Swap.
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