What is Decentralised Finance (DeFi)? Why is it a ‘Big Word’ in 2021?
Decentralised Finance (DeFi) has recently been one of the hottest abbreviations in the cryptocurrency world. A lot of people want to invest in DeFi and use the term, but few understand what it really means? Simply put, DeFi is a game changer. DeFi can recreate traditional financial instruments in a decentralised architecture (outside of governments’ control and companies’ control). While centralised finance like banks own all aspects of payment platforms, decentralised finance puts the power back in your hands.
DeFi has become an umbrella term for various financial applications using cryptocurrency or blockchain toward disrupting financial intermediaries. Inspired by blockchain, the technology behind the digital currency, DeFi enables several entities to hold a copy of a history of transactions without a central source. Unlike traditional platforms, DeFi doesn’t need human gatekeepers that can limit the speed of transactions or impose costs.
Of course, one of the main advantages of DeFi is cutting out middlemen. DeFi was well-known as “open finance” before we heard of the term. Originally, Bitcoin and Ethereum were considered as DeFi applications. Those digital assets have been distinct payment methods, as complex financial institutions are out of the picture.
Here are the most popular types of DeFi applications:
· Stablecoins: A cryptocurrency with a stable price, often tied to a fiat currency such as Indonesian Rupiah (IDRP), Euro or Dollar (USDT).
· Decentralised Exchanges (DEX): Online exchanges that connects users to exchange currencies for other currencies, such as US dollars for Bitcoin, or Ethereum for other tokens.
· “Wrapped” Bitcoins (WBTC): allows users to earn interest on the bitcoin they lend out through the decentralised lending platform. WBTC is also the way to send Bitcoin to the Ethereum network, making the coin usable in Ethereum’s DeFi system.
· Lending platforms: Smart contracts in these platforms can replace traditional intermediaries with deals made directly.
· Prediction markets: Markets to predict the outcome of certain events.
In these digital era, DeFi concepts are growing. Some of these include:
· Yield farming: Users (or knowledgeable traders who are brave enough to take on risk) can search for larger returns by scanning through various DeFi tokens.
· Composability: Open-source apps, letting the code behind them is public for everyone. These apps can be used to “compose” other apps with the code as building blocks.
· Liquidity mining: The busiest form of yield farming, as the applications entice its users to their platform by giving them free tokens.
· Money Legos: DeFi apps are actually like Legos, children’s toy blocks that click together to construct buildings. These applications can be similarly snapped together, just like Lego, in order to build brand new financial products.
With more developments of DeFi in the future, we can expect much growth of DeFi in 2021. Many investors are putting their stakes on DeFi. Are you one of them? WadzPay is firmly at the forefront of current and upcoming DeFi technology.