According to DeFi Pulse, the value of cryptocurrency held in Decentralized Finance (DeFi) projects, measured by total value locked or T.V.L. was over USD $80 billion as at 31 March 2022. Investment in DeFi is growing at an exponential rate, with DeFi technology promising new and innovative opportunities for the digital economy. In this TokenMason article, we explore what DeFi is, provide practical examples and discuss the opportunities it brings.
What is DeFi?
DeFi, short for decentralized finance is a collective term that brings together financial technology (fintech) based on decentralization and distributed ledgers via peer-to-peer (P2P) networks and blockchain technology. Cryptocurrencies, stablecoins, decentralized exchanges (DEX), decentralized autonomous organisations (DAO) and decentralized apps (dApps) are all examples of DeFi technology in practice.
DeFi essentially removes the need for intermediaries such as banks and institutions when transacting and delivering products and services. The key attractions of DeFi for consumers and businesses include seamless transactions and eliminating transaction fees charged by intermediaries such as banks.
This is accomplished through peer-to-peer financial networks and blockchain technology such as using cryptocurrencies and stablecoins. From anywhere around the world where there is an internet connection, you can transact for goods and services using DeFi.
Practical Examples of DeFi
Decentralized finance is still in the beginning stages of its evolution. However, there already been significant development and innovation with DeFi, even at its infancy. As discussed in the previous section, cryptocurrencies, stablecoins, DEX and DAO are practical examples of DeFi. DeFi applications (dApps) are also practical examples of DeFi and further discussed in our dApps article.
Applications called dApps are used to manage transactions that run on the blockchain and gives uses more control over people’s money through digital wallets. With dApps, users can use P2P lending to lend out crypto and earn interest, while borrowers can obtain loans instantly without completing paperwork using “flash loans” that traditional banks don’t offer.
The transactions are recorded on the blockchain, when the borrower receives their loan the consensus mechanism verified it and the lender can seamlessly collect payment from the agreed-upon terms.
Benefits of DeFi
DeFi brings tremendous opportunity and innovation to the economy. The main benefits include ease of access, privacy, affordability and speed (further discussed below), which will benefit consumers and businesses and can enable significant productivity and economic growth.
- You don’t need to physically open an account or go through tedious paperwork, since you can create a digital wallet seamlessly.
- You can maintain full privacy and not have to share your personal information and can’t be used for targeted marketing or identify theft.
- Given that transactions are done on the blockchain, there is no need for an intermediary like a bank or financial institution, which can save you from paying expensive transaction fees.
- With DeFi, you can move your assets instantly, anywhere at any time, without asking for permission or wait for long transfer time for your assets to settle and clear.
How TokenMason Can Assist
We hope you have found this blog useful and learned more about DeFi and the opportunities it brings to the digital economy. Please visit our Blog page for more blockchain related news and articles.
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