Blog: What is DeFi?
DeFi (Decentralized Finance) is currently one of the most significant topics in the cryptocurrency world, and it is expected to change the way we use banking services in the future. In practice, DeFi means that traditional financial services are brought on a decentralized blockchain, eliminating the need for third parties such as banks. The purpose of this text is to inform the reader about DeFi and the opportunities it offers.
What is Ethereum?
DeFi is very strongly associated with the cryptocurrency called Ethereum. For this reason, it is good to go through the basics of Ethereum first. Mastering the basics of Ethereum will also help you understand the technology behind DeFi.
Ethereum is currently the world's second-largest cryptocurrency after Bitcoin. Ethereum's operations officially began in the summer of 2015. Ethereum's popularity has grown steadily over the years, and today it has established itself at the top of the cryptocurrency world.
Ethereum's operating principle differs very much from the world's most famous cryptocurrency, Bitcoin. Ethereum is a complete ecosystem and programming platform, while Bitcoin can be seen as a digital exchange tool and value preserver. The potential of Ethereum is tremendous, and many of today's most significant innovations related to blockchain technology have been made using Ethereum's blockchain.
Ethereum is the largest and best-known cryptocurrency in the cryptocurrency platform category. In addition to various decentralized finance applications (DeFi), it is also possible to program on top of Ethereum, e.g., smart contracts and distributed applications (dApp). Applications built on the Ethereum platform often aim to eliminate third parties and various intermediaries such as banks. The importance of Ethereum in the cryptocurrency market is enormous. Most of the new cryptocurrencies that have entered the market in recent years are built on the Ethereum blockchain.
Ethereum is fully decentralized and is not under the control of any single entity. Ethereum refers to the entire ecosystem of Ethereum. Within this ecosystem also operates Ethereum's cryptocurrency ether (ETH). Ether's goal is to act as a virtual fuel for using the Ethereum platform. Every application built on top of Ethereum always needs a certain amount of ether to work, and using ether, it is possible to obtain computing power from Ethereum's network.
The number and quality of applications in the Ethereum blockchain and the number of transactions performed in the blockchain naturally affect the Ethereum ecosystem's value. If the Ethereum ecosystem's popularity grows, and new and innovative DeFi applications are built on top of it, more ethers will be used. The increasing use of ethers is leading to an increase in the value of the Ethereum ecosystem. Indeed, the growing popularity of DeFi services has recently been directly reflected in the increased use of the Ethereum ecosystem.
Decentralized Finance (DeFi) is a very topical entity closely related to the Ethereum platform. DeFi is a generic term for various services that seek to build an entirely new financial sector that is not dependent on the traditional banking world. In theory, DeFi is not tied to any single blockchain-based platform, but in reality, most DeFi services run on top of Ethereum's platform. Operating on the Ethereum platform means that currently most of the popular DeFi services on the market do not have their own blockchain, so all of their operations occur in the Ethereum blockchain.
The number of different DeFi services is currently growing at a tremendous rate. In the future, DeFi will include all similar services currently offered by traditional banks. The various DeFi services enable an open market for everyone. This open market works more efficiently than the traditional banking system. DeFi brings services familiar from traditional banks from existing centralized systems to completely new decentralized systems. The advantages of these systems over current ones are undeniable.
The term digital revolution describes DeFi. DeFi enables billions of people outside traditional banking systems to access banking services. Cryptocurrencies are definitely one of DeFi's most essential pillars. Without cryptocurrencies and blockchain technology, there would also be no DeFi services.
DeFi has the greatest impact on the lives of people in the poorest countries on earth. Soon, people who have not previously had access to traditional banking services will be able to get interest on their deposits, raise a loan against their deposits, and send money to each other at low cost in the blink of an eye. By using Bitcoin and various DeFi services, anyone can act as a bank themselves, regardless of their socio-economic status. The lack of a traditional bank account is no longer an obstacle to, for example, raising interest income or obtaining a loan.
While the benefits of DeFi will highlight in the world's poorest countries, it will also change the way people in the West use banking services. The various DeFi services have received a lot of publicity during 2020. The loan and deposit services provided by DeFi have recently gained tremendous popularity among investors. Currently, banks do not offer interest rates on deposits, so a multi-percent annual interest rate from various DeFi services appears to be a very attractive option for investors.
DeFi is currently developing rapidly, and new types of services are entering the market with a constant supply. An excellent example of DeFi's development is the recent arrival of DeFi-based futures and other more complex investment instruments. In a few years, it may be possible that the traditional banking world will offer significantly less variety of services than the various DeFi services built on distributed blockchains.
DeFi is currently definitely one of the hottest trends in the cryptocurrency world. DeFi is a unique entity, the benefits of which are undeniable compared to traditional systems. DeFi already includes a wide range of services familiar from the traditional banking world. The number of DeFi services is continuously growing, and new, even more innovative solutions are continually entering the market. In the future, DeFi services based on blockchain technology are likely to change our world more than we can even imagine today.
Mikko Soon Cryptocurrency specialist