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May 29, 2021 | Tutorials

What is De-Fi?

In its simplest form, DeFi is “decentralized finance” which is an inclusive phrase used to describe financial services which rely upon smart contracts and operate without a central authority. These are agreements which do not necessitate traditional mediators and institutions, such as banks or lawyers, but instead utilize online blockchain technology. Perhaps cryptocurrencies are the most widely known form of decentralised finance; however, DeFi takes a multitude of other forms. These include platforms such as Compound or Aave, which allow for the borrowing and loaning of cryptocurrencies to accrue interest. Another avenue for the utilization of DeFi can be found on the platform Synthetix, which allows users to trade real world derivatives such as currencies or precious metals. Even the gambling arena has made use of decentralized finance with systems such as Augur, which allows users to bet on the outcome of real-world events. Also in the “bettingsphere” is the real-world lottery system PoolTogether, in which each participant’s contribution is returned to them, leaving one participant to win the interest accrued by the shared value of the contributions. There are a plethora of advantages to DeFi over traditional financial systems. Crucially, DeFi allows easy access to financial services, particularly for those who are isolated from current financial systems. In particular, DeFi allows access to banking-like services in countries where the banking system is no longer an effective proposition. This could be due to either underdevelopment, inaccessibility, or government control. DeFi also eradicates the costs associated with traditional mediators and arbitrators as, unlike traditional financial systems, DeFi does not rely upon intermediaries making a profit. Yet another advantage is the elimination of single points of failure: DeFi services function on top of blockchains. The shutdown or censorship of an entire service spread across thousands of nodes would be a complicated undertaking, and therefore DeFi offers a great deal of security over centralized finance. Finally, DeFi offers a level of transparency which cannot be offered by traditional finance systems. The ‘open-banking’ system is built into the very core of DeFi, meaning that every transaction is publicly visible on the blockchain, verified by other users. Considering these various advantages, it is not difficult to see why DeFi has become so popular in the current financial market. In fact, as of April 2021, CoinGecko has calculated the total market capitalization for DeFi at $128 billion. With the growth of digital identity and tokenization, the future of DeFi is certainly an exciting one. Author – Millie Bound

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