What Is DeFi — Exscudo Blog

What Is DeFi: Definitions

  • the open ecosystem that consists of blockchain-based financial apps, digital assets, and protocols;
  • the Open Finance movement that promotes the development and usage of decentralized financial products.

Cryptocurrencies, Fintech, and DeFi: Key Differences

  • Cryptocurrency is the blockchain-based digital money that makes transfers direct, cheap, rapid, secure, and borderless. No matter where the payer and payee are located — they can send and receive crypto funds in a peer-to-peer manner within the same network.
  • FinTech (Financial Technology) is often confused with DeFi, and for a reason. First, they sound alike. Second, both things seek to make financial services more accessible and convenient for the average user. Note that FinTech is broader than DeFi: this umbrella term may cover both centralized and decentralized financial solutions. Thus, most FinTech projects aim to improve, and not to disrupt traditional infrastructure. Good examples would be Transferwise, a global money transfer service, crowdfunding platforms like GoFundMe, and mobile payment apps like Venmo by PayPal.
  • DeFi as a term is broader than cryptocurrency but more narrow than FinTech. This ecosystem builds upon the blockchain technology and relies on peer-to-peer transactions between network users.

DeFi and Ethereum

The Decentralized and Centralized Compared

Centralized Transfer: Example

DeFi Transfer: Example

DeFi: Main Products

  • Stablecoins. This type of cryptocurrency features minimal volatility, as its value is pegged to a fiat currency (USD, EURO) or a commodity (gold, oil, and other basic goods). Therefore, such coins add stability to the crypto ecosystem. Currently, the most famous Ethereum-based stablecoin is DAI by MakerDAO.
  • Landing protocols. On decentralized platforms like Aave, users can lend and borrow money and earn interest. The key difference between Aave and a bank is that there are no central authorities to determine interest rates and loan terms. The system applies smart contracts to connect borrowers and lenders and distribute interests. There are no rigid conditions: you can choose between fixed and flexible rates. It’s up to your to decide what looks better.
  • P2P marketplaces and exchanges. A good example is OpenSea, a peer-to-peer marketplace. It allows users to buy and sell various digital items, including collectibles. The non-fungible assets, traded on the platform, comply with the ERC-721 and ERC-1155 standards. Read more about these standards and non-fungible tokens in this article.
  • Investment platforms like Synthetix. They give users an opportunity to create “synthetic” versions of real assets like currencies, commodities, and stocks. On this non-custodial platform, you can trade such “synths” in a peer-to-peer manner.
  • Insurance. Due to smart contracts, insurance agreements become more convenient. As we know, normal insurance payouts may take up to several months (or even years). It’s because a company has to carefully examine and process every claim. A DeFi insurance platform using smart contracts can streamline this cumbersome procedure. As soon as the pre-agreed event (like a flight delay) happens, a certain amount of money comes to your wallet automatically.

DeFi: Distinctive Features

  • As the name suggests, these apps are decentralized in nature and backed by smart contracts. If you are not familiar with this concept, read this guide to fill the gap.
  • No trusted authority is necessary to make smart contracts work. They are self-executing agreements, with terms and conditions written in the form of computer code. When certain conditions are met, the program runs automatically. We call it a “trustless system”.
  • Thus, a DeFi system doesn’t need any intermediaries. Potentially, it could make the bureaucratic machine, with its complicated hierarchy, unnecessary.

DeFi Benefits

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