What Is Decentralized Finance?
Decentralized Finance also known as DeFi is an umbrella for a variety of applications and protocols that do not rely on central intermediaries like conventional financial institutions while offering peer to peer alternatives to users in the cryptocurrency world. Built mostly on the Ethereum blockchain, DeFi is a form of finance that allows users lend, borrow and trade using smart contracts which facilitates the interaction between these parties.These days, many alternative networks have emerged due to the expensive nature of transactions on the Ethereum blockchain to provide even faster and cheaper services.
Many believe that the launch of Ethereum in 2015 ushered in the world of DeFi but the possibility of DeFi wouldn't have been if Bitcoin was created. DeFi is built around decentralized applications as well which allows for financial functions on the blockchain just like the conventional financial institutions. Transactions can be made without a centralized exchange or government all mediated by smart contract programs. This means anyone with a good internet can access the blockchain and cryptocurrencies from anywhere in the world and therefore providing a permissionless, transparent and wide financial network.
Decentralized Finance has birthed a lot of improvement in the crypto world and one of them includes lending and borrowing. This gives crypto holders the opportunity to lend and borrow while depositing collaterals on the blockchain. For example, those with stable coins can lend assets to a liquidity pool in a borrow/lending protocol which allows other users borrow from. Top DeFi lending/borrowing platforms include Compound Finance and Aave Protocol. These protocols offer these services while adjusting interest rates to suit the current demand for their asset using computer algorithms.
Another benefitial addition to the crypto space is Decentralized Exchanges. These exchanges allows users exchange tokens for other assets without being restricted by central authorities. Thereby eliminating the costs and control Centralized Exchanges have over users or their assets. Uniswap is a big example and also the largest automated token exchange built on the Ethereum blockchain. Providing functionaries that include; adding and removing liquidity as well as swapping tokens. Providing liquidity pools on decentralized exchanges is also an opportunity for LP providers to make money from exchange fees on these exchanges.
Although DeFi might seem like a great solution to a lot of problems faced in the centralized world, it is not all perfect. Since DeFi can't be controlled, many scammers have hid under it's umbrella to create many fake projects and in 2021, over half of cryptocurrency crimes were committed in DeFi. Another flaw is the uncertainty DeFi projects could face should their blockchain become unstable.
Bottom line, the Pros seem to outshine the cons but these cons can be improved with time and more regulations to protect users from devious schemes. It is certain that with time and improvement, DeFi would get as much recognition and adoption as it deserves.