DeFi is also known as Decentralized Finance. As the name suggests, DeFi uses the technology that remove the involvement of third parties in a financial transaction.
The concept of the Decentralized Finance is gaining traction among people. Because it gives more control on the hands of people over their money.
Moreover, As I have said that third parties are not present in the system of DeFi, that means no fees we will have to pay for a particular transaction.
The system of DeFi relies on the smart contracts present on a blockchain. If you don’t know about blockchain then don’t worry, I have written a detailed post on it. You can read it from here.
So, what are these smart contracts? In simple words smart contracts are nothing but a piece of code present on the blockchain.
Moreover, they are mainly used to automate the processes involved in a particular transaction. So, it’s the time to know about components of DeFi.
Components of DeFi:
The components of DeFi are like the existing financial systems. The components which we will see in this article are as follows:
- Lending and borrowing.
- Stable coins.
- Decentralised exchanges.
- Margin trading.
So, let’s have a look at each one of these.
Lending & borrowing:
When we talk about the DeFi Lending, the investors can deposit a certain amount of money.
They can do so with the help of decentralised application. And in return they will get the interest.
In addition to that, any business or individual can borrow money from a well-defined network, and for that they will have to pay interest on it.
Also, these transactions have the zero involvement of the middleman resulting in zero charges for taking the loan.
Not only this, but the process is also less time consuming as lengthy paperwork is minimised. Current is the most common platform for lending and borrowing.
Some cryptocurrencies like Ethereum and Bitcoin are highly volatile in nature. By this I mean to say that their values change within few minutes or hours.
So, to eliminate the volatility, stable coins are present. And they are also a form of Cryptocurrency.
The different types of stable coins are DAI and Tether. In which DAI is an algorithmic stable coin whereas Tether is a non-algorithmic stable coin.
Decentralised exchanges are like cryptocurrency exchanges that bridges the gap between sellers and buyers. Also, this promotes peer-to-peer transactions between the users.
Derivatives are contracts that derive their value from the performance of an underlying asset. Synthetix is a primary DeFi Application.
Like the traditional finance Margin trading is the practice of using borrowed funds to increase a position in a certain asset. DeFi apps in the margin trading are dy/dx and fulcrum.
As the technology is evolving from time-to-time ways to handle financial works is also keeps on changing.
And evolving technologies such as blockchain, cryptocurrencies, etc are not only changing the ways of financial transaction but also giving us the hint of the new coming version of web which is Web 3 or Web 3.0.
Thank you for reading this post, and I will see you in the next post.