Decentralized Finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services. What is DeFi, and how can we use it?
Decentralized Finance
Eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology
- This is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, and hardware advancements
- From anywhere you have an internet connection, you can lend, trade, and borrow using software that records and verifies financial actions in distributed financial databases
DeFi Currency
DeFi is designed to use cryptocurrency for transactions
- Much of the concept revolves around stable coin
- A cryptocurrency backed by an entity or pegged to a fiat currency like the dollar
- The technology is still developing, so it is difficult to determine precisely how existing cryptocurrencies will be implemented
The Future of DeFi
Decentralized finance is still in the beginning stages of its evolution
- It is unregulated, which means the ecosystem is still riddled with infrastructural mishaps, hacks, and scams
- Current laws were crafted based on the idea of separate financial jurisdictions, each with its own set of laws and rules
- DeFi’s borderless transaction ability presents essential questions for this type of regulation
How Does DeFi Work?
Decentralized finance uses the blockchain technology that cryptocurrencies use
- A blockchain is a distributed and secured database or ledger
- Applications called dApps are used to handle transactions and run the blockchain
- In the blockchain, transactions are recorded in blocks and then verified by other users
What Is Total Value Locked in DeFi?
Total value locked (TVL) is the sum of all cryptocurrencies staked, loaned, deposited in a pool, or used for other financial actions across all of DeFi.
- It can also represent the Sum of specific cryptocurrencies used for financial activities, such as ether or bitcoin.
DeFi Financial Products
Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi
- In DeFi, you’d use your decentralized finance application (dApp) to enter your loan needs, and an algorithm would match you up with peers that meet your needs
- The transaction is recorded in the blockchain; you receive your loan after the consensus mechanism verifies it
