What is decentralised finance (DeFi?)Trying to understand decentralised finance? Let’s break it down into a simple definition: Decentralised finance (DeFi) describes an ecosystem of conventional finance tools that are built on a public blockchain. This creates an open-source system that’s available to everyone and doesn’t require a centralised authority in order to operate. DeFi users are able to use peer-to-peer (P2P) applications to interact with the ecosystem, maintaining full control over their own assets.
What are the benefits of DeFi?Brendan Foster (co-founder of Dhama, a crypto-lending service), describes the benefits of DeFi in the following way: “Financial services can be 10X better than they are today. DeFi is more global, accessible and transparent than traditional financial services.” Some other core advantages of decentralised finance include:
- There is a potential for new financial markets, products and services to be created using public blockchains
- DeFi applications don’t require any intermediaries (middle-men) to run. Traditionally, the finance sector requires third-party institutions such as banks
- Individuals can access DeFi applications, even if they previously had limited access to financial services. E.g. low-income individuals can benefit from lower costs and the removal of institutions like banks that need to make a profit
- Public blockchains are a good candidate for global implementation, as they don’t require permissions for users to join and interact
- There is an added element of transparency, compared to traditional finance models
DeFi use casesMonetary systems that operate on a public blockchain offer a number of new applications – and the potential of use cases continues to rise. Here are just some potential uses for decentralised finance.
Improved international money transfersSending money across borders is traditionally expensive. DeFi would be able to significantly reduce the fees associated with sending money internationally.
Better loan managementThe crypto lending space is already demonstrating its benefits over other methods of money loans. Before, individuals could not take out a loan without access to a bank or similar service, requiring a credit score or banking record in order to be eligible to borrow money. DeFi connects lenders with borrowers more easily, allowing credit checks and digital assets to be transferred quicker and easier.
The creation of stablecoinsStablecoins are a type of cryptocurrency that are backed by a reserve asset, which is designed to offer better value stability. Stablecoins are able to offer the security and privacy of cryptocurrencies, with the stable, volatile-free valuations of traditional currencies. Stablecoins are digital currencies that can actually be used by the general public and released by governments, allowing real-world assets to be added to the blockchain.
What else do you need to know about DeFi?In your journey to properly understanding DeFi, you might come across some new terms and ideas. Here are some definitions that could come in useful:
- Open lending protocols – due to the rise in P2P protocols and liquidity pool designs, decentralised lending is a hot topic in the blockchain industry. Thanks to the removal of the need for credit checks, instant settlement and integrations with digital assets, open lending protocols continue to soar.
- Issuance platforms – we can expect issuance platforms and investment management frameworks to become more prevalent as open finance becomes more widespread. More issuance platforms are focusing on the security token market, providing the facilities for issuers to establish tokenised securities on a blockchain.
- Decentralised prediction markets – while they are highly complex, decentralised prediction markets offer huge potential. They allow for the traditional processes of speculating and predicting risk around world events, with the integration of cryptocurrencies and no way to censor markets.
- Exchanges and open marketplaces – exchanges in an open finance environment relate to decentralised exchanges, meaning no intermediary third-party is necessary.