Is DeFi a solution ...

Is DeFi a solution for mainstream adoption?

 

Since a few months you cannot ignore the term DeFi. You read about DeFi coins everywhere. But what does it mean and where does it stand for?

Even on Coinmarketcap.com there is a full page dedicated to DEFI coins. There are about 100 different coins now, CHAINLINK is the number 1 on the ranking list. In our search we found so much information that we will try to collect everything in one article and keep it as simple as possible.

We start with the definition of DEFI:

DeFi is directly connected to financial smart contracts, decentralised applications (DApps), and protocols that are unique to Ethereum (ETH), the second-highest market cap cryptocurrency after Bitcoin (BTC). Some of the better-known DeFi platforms include decentralised exchanges, lending and borrowing markets and tokenised physical assets such as gold. It has even expanded to include other financial services such as derivatives, payment networks and insurance.

If you are a noob to the world of crypto, this is probably like reading a foreign language. We explain these key elements so you can follow the rest of the given information:

Smart contracts.

These are at the core of what makes Ethereum unique. They allow applications or scripts running on its network to create digital assets. This enables complex irreversible agreements, such as payments or transfers, to be authorised with no need for a “middleman,” which would traditionally be a bank or some other established financial institution.

 

Decentralised Applications (DApps).

A DApp is a software application that runs on a distributed peer-to-peer network rather than being hosted on a centralised server. They can be like any app that you access using a web browser or your smartphone, except that it runs on a decentralised network such as Ethereum.

Decentralised Exchange (DEX).

A decentralised exchange is like an online trading platform like eToro except that it is run by smart contracts using the Ethereum blockchain. Instead of traditional assets, it allows you to trade cryptocurrency coins and tokens. The main benefit of a DEX is that due to it being decentralised, the risk of losing your assets to external hacks or internal fraud is greatly reduced.

 

How is DeFi different from traditional finance?

Why would you ever consider using DeFi instead of traditional banks & trading platforms?

What are the key advantages?

 

1) Instead of relying on humans to manage operations, DeFi relies instead on rules written in code (smart contracts). Once your smart contract has been deployed onto the network, the DApp is able to run itself with minimum human interaction.

2) Due to the decentralised nature of blockchain, the smart contracts are essentially open source and can be audited by anyone. This results in a high level of user trust since everyone can learn the contract’s code or find bugs. All transaction activity is also public for anyone to view. Privacy is retained since every transaction is not tied directly to your real-life identity.

3) DeFi and the DApps that power it is designed to be accessed globally, free from the constraints of international borders. Wherever you are, you will be able to access your DeFi services with just an Internet connection, although you should not forget that local regulations regarding digital currencies may still apply.

4) DeFi is ‘permissionless’, which means there are no middlemen to deal with or lengthy forms to fill out. You can interact directly with the smart contracts from your crypto wallet.

5) Since DeFi is ‘permissionless,’ anyone can build or modify them. Think of smart contracts like an open-source API: if you do not like the interface of one of your DApps, you can simply use a third-party one, or even build your own.

6) New DApps can be freely created or customised by seamlessly combining other DeFi products like digital Lego pieces. Size is no issue, with large and complex DeFi platforms such as decentralised exchanges or prediction markets having the ability to form entirely new products.

 

What are the disadvantages:

1) Decentralised blockchains are currently slower than their centralised counterparts, and this impacts the DApps that are built on top of them. Despite this, many developers are optimising their DApps to negate this shortcoming and the technology itself is improving constantly.

2) Seen by some as a core tenet of cryptocurrency and by others as one of its biggest hurdles for mass adoption, DeFi transfers all of the responsibility from the intermediaries to the user. If you accidentally transfer funds to a wrong address or forget the passphrases to your wallet, then your money is gone. There is no bank customer support line you can call to undo a transaction or regain access to your account.

3) DeFi en de DApps die de macht het is ontworpen om wereldwijd toegankelijk te zijn, vrij van de beperkingen van de internationale grenzen. Waar u zich ook bevindt, u krijgt toegang tot uw DeFi-diensten met slechts een internetverbinding, hoewel u niet mag vergeten dat de lokale regelgeving met betrekking tot digitale valuta nog steeds van toepassing kan zijn.

4) DeFi is ‘permissionless’, wat betekent dat er geen tussenpersonen zijn om te behandelen of lange formulieren in te vullen. U kunt direct communiceren met de smart contracts uit uw crypto portemonnee.

5) Since DeFi is ‘permissionless,’ anyone can build or modify them. Think of smart contracts like an open-source API: if you do not like the interface of one of your DApps, you can simply use a third-party one, or even build your own.

6) New DApps can be freely created or customised by seamlessly combining other DeFi products like digital Lego pieces. Size is no issue, with large and complex DeFi platforms such as decentralised exchanges or prediction markets having the ability to form entirely new products.

 

What are the disadvantages:

1) Decentralised blockchains are currently slower than their centralised counterparts, and this impacts the DApps that are built on top of them. Despite this, many developers are optimising their DApps to negate this shortcoming and the technology itself is improving constantly.

2) Seen by some as a core tenet of cryptocurrency and by others as one of its biggest hurdles for mass adoption, DeFi transfers all of the responsibility from the intermediaries to the user. If you accidentally transfer funds to a wrong address or forget the passphrases to your wallet, then your money is gone. There is no bank customer support line you can call to undo a transaction or regain access to your account.

3)Blockchain tech is inherently complex and the additional steps required to use DeFi services can be quite daunting to newcomers, which is compounded by the risk of one mistake resulting in losing your funds forever. Many believe (with good reason) that creating a more user-friendly experience is key to cryptocurrency achieving mainstream adoption.

 

What is DeFi currently being used for?

While the potential use cases for DeFi are enormous, it is an emerging technology that is still in its infancy. Outside of DEX’s, the main DeFi financial service being offered is decentralised borrowing and lending. This allows users to both invest digital assets to earn interest or stake them to borrow stable coins that have value pegged to the US dollar. In a way, it is like the blockchain version of fintech peer-to-peer lenders.

 

The future of DeFi

DeFi surely has the potential to evolve how global financial services operate in a similar way to that in which fintech ushered in the era of online banking and transacting that we take for granted today. However, it is important to remember that blockchains and decentralization are not a solution for everything. Identifying proper use cases that can truly benefit from this emerging technology can be the catalyst for mainstream adoption in the future.

 

On CoinMarketCap there is a special page dedicates to DeFi coins:

https://coinmarketcap.com/DeFi/

 

In total there are about 100 DeFi coins. The most important one is CHAINLINK (LINK).

We hope by reading this article you understand a little bit more about DeFi and the importance of it for the world of Crypto.

 

Team Margin Traders NL

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