Decentralized finance (DeFi) refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an extensive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
Whereas our traditional financial system runs on a centralized infrastructure that's managed by central authorities, institutions, and intermediaries, decentralized finance is powered by code that's running on the decentralized infrastructure of the Ethereum blockchain. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are accessible to anyone with an Internet connection.
The beauty of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are completely new applications that can only exist on blockchains. This paradigm shift in financial infrastructure presents a number of advantages with regard to security, trust, and opportunity.
From DAOs to synthetic assets, decentralized finance protocols have unlocked a world of new potential investment and opportunity for users across the globe. The comprehensive list of use cases below is evidence that DeFi is much more than an emerging ecosystem of applications. Rather, it’s a comprehensive effort to build a parallel financial system on Ethereum that rivals centralized services because it's profoundly more accessible, resilient, and transparent.
Asset management
With DeFi protocols, you're the custodian of your own crypto finances. Crypto wallets like MetaMask, Gnosis Safe, and Argent help you easily and securely interact with decentralized applications to do everything from buying, selling, and transferring crypto to earning interest on your digital assets. In the DeFi space, you own your data— MetaMask, for example, stores your seed phrase, passwords, and private keys in an encrypted format locally on your device so that only you have access to your accounts and data.
Compliance and KYT
In traditional finance, compliance around anti-money laundering (AML) and countering-the-financing-of-terrorism (CFT) relies on know-your-customer (KYC) guidelines. In the DeFi space, Ethereum’s decentralized infrastructure enables next-generation compliance analysis around the behavior of sharing addresses rather than party identity. These know-your-transaction (KYT) mechanisms help assess risk in real time and protect against fraud and financial crimes.
DAO
A DAO is a decentralized autonomous organization that cooperates according to transparent rules encoded on the Ethereum blockchain, without the need for a centralized, administrative entity. Several popular protocols in the DeFi space, like Maker and Compound, have launched DAOs to fundraise, manage financial operations, and decentralize governance to the community.
Data and analytics
Because of their unprecedented transparency around transaction data and network activity, DeFi protocols offer unique advantages for data discovery, analysis, and decision-making around financial opportunities and risk management. The explosive growth of new DeFi applications has spurred the development of numerous tools and dashboards, like DeFi Pulse and Codefi Data, that help users track the value locked in DeFi protocols, assess platform risk, and compare yield and liquidity.
These are just a few examples for why DeFi protocols have been gaining so much traction recently. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are accessible to anyone with an Internet connection. The beauty of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are completely new applications that can only exist on blockchains.
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