A Comprehensive Guide About Decentralized Finance (DeFi)

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Nobody expected the cryptocurrency sphere to blossom like it has today. When Bitcoin first arrived on the scene in 2009, most people shrugged it off as a fad. Few invested in the digital cryptocurrency from the get-go. However, those who studied Bitcoin’s White Paper knew that the currency would be a gamechanger. Today, the crypto sphere has expanded drastically. 2021 was a monumental year for cryptocurrencies. While 2022 has been disastrous as the crypto bubble burst, no signs indicate that cryptocurrency will go away soon.

While cryptocurrencies were envisioned as currencies people would use in the future, they’ve failed to actualize that vision. However, that doesn’t mean they don’t have their applications. The crypto and blockchain sphere has numerous projects and companies working on solutions with various use cases. You might have heard of some of them.

You’ve likely heard about decentralized finance if you’re even remotely interested in the crypto sphere. The Decentralized finance sector – commonly abbreviated as DeFi – is a niche within crypto that has gained significant steam in the past few years, and it continues to take the world by storm.   

Statistics show cumulative revenues on DeFi protocols exceeded $4.5 billion in March 2022. According to the IDC’s analysis, overall spending on decentralized networks skyrocketed from $1.7 billion in 2019 to $6.6 billion in 2021.

Reading about such statistics might have intrigued you to learn more about DeFi. If that’s the case, we’ve got you covered.

What is Decentralized Finance?

Decentralized finance is a growing niche within the crypto sphere. It originated as an alternative to traditional finance because the latter has numerous issues and complications. Traditional finance is highly centralized, requiring people to go through financial institutions to store, send, or receive money. These traditional establishments hold and control your assets. In addition, they have stringent regulations with high transaction fees. As a result, traditional finance has several hurdles users must overcome before completing transactions, making the entire process cumbersome, expensive, and time-consuming.

Decentralized finance eliminates financial intermediaries like banks and lenders from the process. It achieves this through smart contracts recorded over blockchain networks. Since there are intermediaries in DeFi, users save time and money while gaining control and autonomy over their assets.

DeFi Use-Cases

Understanding DeFi’s use cases can help you understand how it works better. Here are some DeFi use cases:

Lending Platforms

The DeFi ecosystem has become particularly popular for lending and borrowing activities. DeFi applications allow users to borrow funds while keeping their cryptocurrency holdings as collateral. Other options like staking have also become popular activities in the DeFi space.

Payments and Stablecoins

Switching from traditional to decentralized finance is challenging. You’ll still need to use decentralized finance to make payments. The difference is you’ll now be using your DeFi application or protocol instead of a commercial bank. Unfortunately, cryptocurrency isn’t a viable payment option because not everyone accepts it. In addition, crypto’s price volatility makes it unusable in some instances. As a result, stablecoins have emerged, bringing stability to the DeFi market. Stablecoins are generally pegged to a fiat currency – usually the US Dollar. As a result, they don’t suffer from price volatility, making them viable options for online payments, deposits, etc.

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