If you follow crypto, chances are you've been hearing a lot more about something called 'DeFi,' or Decentralized Finance. It may be the hot buzzword of the industry today, but it's been one of the fastest growing sectors of the blockchain industry since 2019, with far reaching implications for the future of the finance.
Those implications stem from one key difference: in traditional financial services, 3rd party middlemen are required for for every transaction, while the DeFi movement is trying to eliminate that need. Like crypto overall, the DeFi ecosystem offers an alternatived to most available financial service: savings, lending, trading, insurance, and more.
In this article, we will explore the development of the DeFi ecosystem and explain 2 essential points:
As an abbreviation for "Decentralized Finance", DeFi theoretically allows anyone with Internet access to be able to trade, lend, borrow and bank peer-to-peer without the need for middlemen. Traditional finance relies on third parties such as banks that grant permissions to provide banking services, and payment processors that act as intermediaries. With DeFi, users can enjoy crypto-based banking services and get started right away without the permission of (or need for) banks, credit card companies, credit reporting agencies or central banks.
DeFi offers several advantages versus traditional centralized finance that are linked primarily to the inherent nature of the blockchain:
Having only gained traction in the last year, the young DeFi space already covers plenty of traditional financial services.
This may be the most popular use case of the ecosystem today. DeFi lending and borrowing platforms allow anyone to borrow and lend as long as they have the appropriate crypto assets to loan out or use as collateral. The most popular method of lending/borrowing in DeFi is the use of lending pools such as Compound or MakerDAO.
Lenders earn interest on the assets deposited in the pool. Borrowers can then take loans from this pool of assets. The interest earned from borrower loans is split up between all of the lenders based on the amount they deposited into the pool.
This area of the DeFi ecosystem covers the issuance of stablecoins, mortgages, and insurance. One of the biggest factors limiting the global adoption of cryptocurrencies is price fluctuations, making many of them impractical for everyday use.
Enter the staggering rise of stablecoins, which are crypto assets programmed to have a consistent value, usually pegged to traditional currencies such as the USD or EURO. Unlike fiat, they have the advantage of being digitally transferable around the world with ease and at much lower costs.
A Decentralized Exchange, or DEX, emulates centralized exchange services. But instead of the exchange 'holding' your assets and executing your trades, a DEX allows users to manage their funds themselves through a series of smart contracts and by using web-browser wallets like MetaMask.
In fact, DEX options are one of the most common user requests we receive here at Quadency, so rest assured that DEX trading is on the roadmap!
This first generation of decentralized applications, or dApps, relies heavily on collateral: to borrow some crypto you need to already own some. As such, we could see further growth with the tokenization of real-world physical assets for use as collateral.
These applications may be the most popular today, but there's much more to DeFi than borrowing and lending and innovation in the industrying is moving at laser speed. As we head towards a more decentralized world, the demand for DeFi will continue to evolve and grow.
DeFi is already starting to provide improved alternatives to traditional finance, with new use cases being established every day.
But if the years 2019 and 2020 are remembered as DeFi's initial growth stage, look out in 2021 for the continued rise of DeFi tokens as their dominance plays out in cryptocurrency charts.
Those implications stem from one key difference: in traditional financial services, 3rd party middlemen are required for for every transaction, while the DeFi movement is trying to eliminate that need. Like crypto overall, the DeFi ecosystem offers an alternatived to most available financial service: savings, lending, trading, insurance, and more.
In this article, we will explore the development of the DeFi ecosystem and explain 2 essential points:
As an abbreviation for "Decentralized Finance", DeFi theoretically allows anyone with Internet access to be able to trade, lend, borrow and bank peer-to-peer without the need for middlemen. Traditional finance relies on third parties such as banks that grant permissions to provide banking services, and payment processors that act as intermediaries. With DeFi, users can enjoy crypto-based banking services and get started right away without the permission of (or need for) banks, credit card companies, credit reporting agencies or central banks.
DeFi offers several advantages versus traditional centralized finance that are linked primarily to the inherent nature of the blockchain:
Having only gained traction in the last year, the young DeFi space already covers plenty of traditional financial services.
This may be the most popular use case of the ecosystem today. DeFi lending and borrowing platforms allow anyone to borrow and lend as long as they have the appropriate crypto assets to loan out or use as collateral. The most popular method of lending/borrowing in DeFi is the use of lending pools such as Compound or MakerDAO.
Lenders earn interest on the assets deposited in the pool. Borrowers can then take loans from this pool of assets. The interest earned from borrower loans is split up between all of the lenders based on the amount they deposited into the pool.
This area of the DeFi ecosystem covers the issuance of stablecoins, mortgages, and insurance. One of the biggest factors limiting the global adoption of cryptocurrencies is price fluctuations, making many of them impractical for everyday use.
Enter the staggering rise of stablecoins, which are crypto assets programmed to have a consistent value, usually pegged to traditional currencies such as the USD or EURO. Unlike fiat, they have the advantage of being digitally transferable around the world with ease and at much lower costs.
A Decentralized Exchange, or DEX, emulates centralized exchange services. But instead of the exchange 'holding' your assets and executing your trades, a DEX allows users to manage their funds themselves through a series of smart contracts and by using web-browser wallets like MetaMask.
In fact, DEX options are one of the most common user requests we receive here at Quadency, so rest assured that DEX trading is on the roadmap!
This first generation of decentralized applications, or dApps, relies heavily on collateral: to borrow some crypto you need to already own some. As such, we could see further growth with the tokenization of real-world physical assets for use as collateral.
These applications may be the most popular today, but there's much more to DeFi than borrowing and lending and innovation in the industrying is moving at laser speed. As we head towards a more decentralized world, the demand for DeFi will continue to evolve and grow.
DeFi is already starting to provide improved alternatives to traditional finance, with new use cases being established every day.
But if the years 2019 and 2020 are remembered as DeFi's initial growth stage, look out in 2021 for the continued rise of DeFi tokens as their dominance plays out in cryptocurrency charts.
Be sure to join us on Telegram, Discord and Twitter!
Quad Terminal simplifies crypto portfolio management by unifying digital asset exchanges into a seamless, all-in-one platform. Traders and investors of all skill levels can access automated bot strategies and a comprehensive 360° portfolio view. Create your free account here!
Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.
Manage all your crypto assets on the go with zero-gas swaps and a unified portfolio at your fingertips.
Disclaimer: Information contained herein should not be construed as investment advice, or investment recommendation, or an order of, or solicitation for, any transactions in financial instruments; We make no warranty or representation, whether express or implied, as to the completeness or accuracy of the information contained herein or fitness thereof for a particular purpose. Use of images and symbols is made for illustrative purposes only and does not constitute a recommendation to buy, sell or hold a particular financial instrument; Use of brand logos does not necessarily imply a contractual relationship between us and the entities owning the logos, nor does it represent an endorsement of any such entity by Quad Terminal, or vice versa. Market information is made available to you only as a service, and we do not endorse or approve it.
Copyright © Quad Terminal
