Decentralized finance (or DeFi) has received unprecedented attention over the last two years. It is not out of the question that we should show it a little closer. In the future, it is likely to have an even more significant impact on the financial system and banks’ functioning than they do now.
DeFi application and the financial system
Decentralized finance is a general term for a financial system that operates without any third party. Such as banks, insurance companies, or other financial institutions. Therefore, DeFi performing base is on smart contracts.
In the summer of 2020, the decentralized experienced a big boom. It catapulted the price of some DeFi tokens to high heights. Billions of US dollars have been invested in the ecosystem, and the growth is mainly driven by Etherea-based applications. Why has the decentralized finance (DeFi) become so popular?
Cryptocurrency loans through decentralized finance
For the first time, DeFi protocols allow you to borrow a more considerable amount of money. This between unknown participants and without any third parties. DeFi applications connect creditors and debtors. They set interest rates themselves by supply and demand.
Projects like Compound or Aave heavily drive cryptocurrency loans in the DeFi industry. Loans are truly inclusive. Mainly because they are secure. Also they can communicate anyone around the world.
Other functions of decentralized finance include insurance. For example, DeFi company Nexus Mutual offers insurance covering errors in smart contracts. Decentralized insurance is still at an early stage of development. Currently we cannot rely on it.
The basis for decentralized finance was laid by stablecoins. It act as a reserve currency. Blockchain-based stablecoins allow participants to engage with each other. This without the risk of price fluctuations. Decentralized finance is also part of several stock exchanges.
With the development of DeFi, the popularity of cryptocurrency decentralized exchanges has also increased. There, cryptocurrency holders no longer have to leave the crypto space to exchange their tokens. An example is the decentralized Uniswap exchange.
Decentralized finance is still at an early stage of development. However, several reasons may one day replace the traditional financial system.