Cryptocurrencies may seem like a genuine rollercoaster to the average person – you keep hearing about it from time to time, but reports vary and you are not exactly sure what to think of this trend. There is obviously something big going on here, but what it is really?
It is impossible to explain the cryptocurrency market and decentralized finance (aka DeFi) in a sentence or two, but we can make an entire article about it and discuss the features that make the new trend so popular and important. Without further ado, here are the top five things you should know about cryptocurrency’s decentralized finance.
1. What Is Decentralized Finance?
The first question we need to answer is fairly simple: What is DeFi?
It represents an experimental form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks, and instead utilizes smart contracts on the blockchain. One of the most frequently used smart contract networks for DeFi operations is Ethereum.
As you can see, the concept of decentralization plays a major role here, but we will get back to its benefits in the next chapter. For the time being, it is necessary to understand the practical effects of cryptocurrency-based DeFi. Namely, the system enables users to purchase, lend, sell, or borrow cryptocurrencies such as Bitcoin and Ethereum.
2. Benefits of DeFi
Decentralized financial systems are not just a theoretical concept with little to no use, but rather highly practical inventions with tons of real-world benefits. Some of the major advantages of DeFi include:
- The lack of centralized authority that monitors and controls financial transactions strictly. With DeFi, users’ deposits are free from external interventions.
- Every participant in the DeFi system gains his own portion of financial sovereignty and democratic control. You know how the system works and you know that nothing can interfere with the process.
- DeFi can reach the highest level of accessibility because, in theory, it only takes the Internet connection to gain access to the system regardless of your location.
- Decentralization and the blockchain-powered platform make DeFi much safer and more difficult to penetrate by traditional hackers and malicious activities.
3. The State of DeFi in 2021
Decentralized finance as we know it today is focused on one thing and that is to eliminate the middleman from financial transactions. As such, DeFi mainly relies on Ethereum as the blockchain that is easy to use and tailor according to the needs of a specific system.
What can a typical DeFi platform do today? The range of DeFi products varies significantly, but most systems guarantee the following functions:
- Cryptocurrency exchange markets free from central authorities
- The ability to borrow or land digital coins
- Near-instant payments from peer to peer
- Advanced asset management through tokenization
- The option of predicting asset fluctuations and capitalizing on your predictions
4. Uniswap Is the Largest DeFi
Uniswap is a decentralized protocol for automated liquidity provision on Ethereum. More importantly, it represents the largest DeFi of our time. The platform enables fast and secure transfers and exchanges through smart contracts, but the whole system is still relatively primitive and it requires major improvements.
Namely, Uniswap and other DeFi protocols overloaded the Ethereum network, thus making it slower and more expensive. The process leads to rather expensive fees, which jeopardizes the whole purpose of DeFi. At the moment, it looks like the solution lies in more advanced DeFi technologies with independent networks that guarantee effortless transactions, speedy services, and low-fee transfers.
5. DeFi and Centralized Authorities
The process of DeFi development is irreversible, but it doesn’t mean that state authorities and other financial institutions are neglecting it. On the contrary, they are showing interest as there is more than enough room to join the game and create a brand new financial product.
The process is still evolving and going hand in hand with the country’s readiness to embrace cryptocurrencies as the new type of currency. So far, countries like Japan, Estonia, and Sweden – to name only a few – have shown interest in creating their own crypto coins and investing in DeFi technologies.
The Bottom Line
Blockchain technology and cryptocurrencies have a plethora of real-world applications, but they seem to be affecting the finance realm most intensely. The reason is simple – there are so many ways new processes and decentralization can elevate financial markets and take them to a higher level.
In this post, we explained the five most important things you should know about cryptocurrency’s decentralized finance. It’s not the end of the DeFi story, but it is more than enough to begin with. If you have any questions or would like us to expand the topic with additional articles, make sure to share your ideas in the comments!
AUTHOR BIO
Jessica Chapman is a digital marketer who creates excellent essay writing service reviews. She loves discussing new IT trends and writing blog posts for software development companies, gaming websites, and other tech-oriented platforms. Besides working, Jessica enjoys traveling and long-distance running. You can find her on Facebook.