DeFi Explained: Why Decentralized Finance Is So Important For Crypto

One of the biggest applications of blockchain technology is in decentralized finance, or ‘Challenge, which is dedicated to reinventing the financial system using decentralized and automated technologies. DeFi is the spiritual successor to Bitcoin’s purpose, allowing crypto holders to access financial services such as loans, savings, trading, and even advanced financial instruments.

The greed and incompetence of the traditional financial system that culminated in the 2008 financial crisis led to the creation of bitcoin and blockchain technology, but bitcoin does not have the financial services that the financial system provides, nor does it There is no way to create these services without relying on centralized technologies. Infrastructure. So while the invention of Bitcoin was an impressive feat, it has since been enhanced by blockchain smart contracts pioneered by Ethereum, which enabled blockchain programmability and paved the way for Web3 blockchain-based internet applications. , as well as thousands of cryptocurrencies and NFTs. today.

Related: Why Some Stablecoins Are Crashing and How to Tell the Difference

After Ethereum was rolled out in 2016, it didn’t take long before developers started creating financial services for cryptocurrencies, which led to the rise of “DeFi”. Investopedia explains that DeFi provides financial services for cryptocurrencies but remains an emerging industry. Rather than relying on banks, DeFi users act like their own banks by approving transactions, protecting their assets, and using their crypto in DeFi apps. DeFi is a very broad category, covering entire asset classes and many types of Web3 applications. Many DeFi applications use stablecoins (stable-value cryptocurrencies), which have become a cornerstone of DeFi due to their use by crypto lending/borrowing platforms like Aave and their usefulness as a means of payment. Additionally, DeFi is well known for its decentralized exchanges, or “DEXs,” such as Uniswap, which allow users to trade between two cryptocurrencies built on the same blockchain. Although not explicitly DeFi, non-fungible or “NFT” tokens have found use in NFT lending/borrowing applications as well as non-NFT DeFi applications that use them to represent crypto deposits and NFT markets. as OpenSea have been an industry staple for years for their role in enhancing NFTs through commerce.

DeFi is an emerging and highly unregulated technology

While many “blue chip” DeFi protocols are considered safe to use (especially those mentioned above), DeFi is a Wild West of new ideas and experimentation, much of which explodes due to unforeseen complications or is impacted. by hackers or crypto phishing attacks. As a result, DeFi has gained a reputation as a gambler’s paradise, although DeFi risk is entirely dependent on the user’s choices and understanding of the concepts they are working with. DeFi has already crossed paths with regulators, who are not amused by the complete lack of compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) policies that all other financial services must adhere to, as well as the inability of DeFi applications from following such policies due to their immutability.

According DeFi Pulse, there is currently (September 2022) a staggering $26.3 billion in assets locked in DeFi smart contracts, and as of October 2021, the highest value locked was $45.5 billion. DeFi is still a niche industry with a lot of “learning experiencesahead of it, but it could easily become a multi-trillion dollar industry in the future, given its usefulness and vast reach. While DeFi could theoretically pose an existential threat to the existing financial system, both systems will likely coexist and form a symbiotic relationship. firewall reported, Aave has already jumped on this idea with Aave Arc, a permission lending pool for institutional clients. It seems inevitable that banks will eventually have their own smart contracts to send and receive blockchain stablecoins.

DeFi is still a fledgling industry striving to create financial services for cryptocurrencies and blockchain assets, but it is set to become one of the strongest industries in the world over the next few years. For now, it’s a playground for gamers, geeks, scammers, hackers and visionaries, but many DeFi apps have proven their durability and security, and with better user experience, Challenge will become a major financial technology that everyone uses in one way or another.

Sources: Investopedia, Aave, Uniswap, OpenSea, DeFi Pulse, firewall