What exactly is Decentralized Finance?
To understand Decentralized Finance (DeFi), we need to understand the term “decentralize”. As oxford explained, it is to disperse authority and control to more than one entity/person.
With the understanding of “decentralize”, we can expect decentralized finance to represent financial systems that are not controlled by major corporations such as banks, authorities and so on. In decentralized finance, the use of emerging technologies, stablecoins and customised applications are designed to overcome current standards.
What is different from the current standard?
The current financial system that we are used to such as banks, credit card companies and fund houses are based on centralize systems. In other words, they have power and control over funds/money that you pass to them. Normally they charge users a middle person fee for their service. The objective of these third parties is to make money, hence they charge all types of fees on the user, which is you in other words. However, most of the merchants who offer credit card payments will pay the somewhat 3% to the credit card companies but some businesses will not. Users who choose to swipe their credit card will be required to pay for the fee. To be honest, how do we know if the price tag is not inclusive of the 3% credit card charge?
Along with the development of crypto currency and blockchain, new protocols in decentralized finance are developed that aime to reduce third parties and costs in transactions in current financial arrangements. In other words, users will have options to pay what type of costs they think is reasonable for any services they desire.
Who are the key players in DeFi?
The first Blockchain that developed Smart Contract Applications is Ethereum, riding on its popularity in adoption, Eurus, Algorand, Cardano, EOS, Polkadot and Solana (which is one of the largest platforms with the rise of NFT).
MakerDAO and Compound Finance are leading lending DeFi platforms that provide yield farming or liquidity mining. Uniswap, a decentralized exchange, allows users to “exchange” tokens at an agreed value.
How does DeFi work?
As previously mentioned, it’s a set of programs known as decentralized applications (DApps) that are built to run financial processes on the Blockchain. These automated processes are executed when required parties of the process agree and acknowledge the use of smart contracts. This cuts away middle persons and makes the financial processes cheaper and easier.
These smart contracts are normally open source code maintained by a community of developers, and they can be read and used via a web browser.
What products are available under DeFi?
Simply imagine DeFi is similar to a bank, it offers all similar products but it is automated and very much self service.
Decentralized borrowing and lending
Now getting a loan can be done within minutes, no more paperwork and documentation verification. With Smart Contracts, you can get loans from anyone who is ready to loan you, the persons who providing the loan will get an interest out of it. This is known as “Yield Farming” in Crypto terms.
Decentralized exchanges
Doing trade without identity verification, normally these platforms enable you to connect your digital wallet directly and start trading. This cuts away the cumbersome KYC processes that traditional exchanges require. On the other hand, this is also a non conformity to regulations relating to Anti Money Laundering.
MappedSwap is a decentralized, on-chain margin trading exchange, and it provides up to 10x collateral of borrowed funds to help in user’s trading needs. Users can opt for leverage activities to get more out of MappedSwap’s offerings.
Decentralized insurance
Similar to borrowing and lending, you can now insure your assets over a premium in a peer to peer model. This process provided by Smart Contract ensures it is safe and efficient without traditional paperwork and intermediaries.
The Future of Decentralized Finance
Removing intermediaries and authorities is a step to financial freedom to the people, however, with such high potential, we believe that authorities will soon set steps and processes to ensure regulatory compliance to safeguard the flow of monies.
Disclaimer:
Investing in decentralized finance products is considered high risked, especially with cryptocurrency. We are not responsible in any way for inciting any decisions that you may undertake upon reading our materials. We do not provide professional financial advice, when in doubt, please consult your professional financial advisor before acting.
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