DeFi — understanding decentralized finance

Decentralized finance (DeFi) has been the buzzword for some time, following the surge in platforms and products that utilized these services. Lending protocols, security tokens, derivatives, exchanges, etc. Ethereum’s DeFi landscape is playing out as one of its most elaborate application environments, even with the network’s scaling problems looming over the whole project.

What is DeFi?

If you want to put it simply, it is essentially just conventional financial tools built on a blockchain — more specifically on Ethereum. They are mostly predicated on open-source protocols or modular frameworks for creating and issuing digital assets and utilizing the advantages of operating on a public blockchain like censorship-resistance and improved access to financial services. Since decentralizing everything is not a prudent move, an alternative term that is more encompassing of the ongoing focus on financial products is open finance. Here, an ecosystem of integrated digital assets, blockchains, and open protocols are ingratiating themselves with conventional financial structures.

  • collateralization of digital assets
  • instant transaction settlement and innovative secured lending methods
  • no credit checks, i.e. a broader access to people that cannot tap into traditional services
  • standardization and interoperability, leading to a reduction of costs with automation

Who is it for?

Historically, since central authorities such as governments issue currencies that are the backbone of the economy of any given country. Central banks and other institutions are expected to regulate and manage the supply of currency in use. Although you trust your government to not print more money out of the blue, these bodies gain more and more power and the sad truth about our current financial system is that the power that comes along with you putting your trust in them isn’t always rewarded. We often have very little say in how companies handle our investments — not to mention how little our opinions matter in how our governments manage the economy.

  • stablecoins (tokens)
  • decentralized exchange (DEX)

Levels of decentralization

There are varying degrees of decentralization when we talk about DeFi services. For example, let’s say you’re purchasing a home on the blockchain. Also, say, someone tokenizes the deed to their home, places it on a decentralized exchange, and you buy it. Without the proper legal setup and the law on your side, you aren’t able to force this person from their home regardless if you own the digital version. As it currently stands, you’d need to fall back on the court system of your home country to settle the dispute.

Conclusion

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