The decentralized Finance Protocol has been growing rapidly since its release earlier this year. With more than 1,000% gains in just one month, the success of DEFI has become very clear, but what exactly is the DEFI Protocol? How does it work?
This guide will help you understand how the DEFI Protocol works and why it’s expected to grow quickly in the coming months and years.
If you want to start using DEFI but aren’t sure where to begin, keep reading to learn everything you need to know about this innovative new network.
An Introduction to DECENTRALIZED FINANCE
DECENTRALIZED FINANCE (DEFI) protocol is a decentralized platform where peer-to-peer financial applications can be easily built, deployed and governed.
It aims to solve key barriers preventing crypto assets’ mass adoption by traditional players of financial markets by providing off-chain scaling solutions to decentralized exchange, lending, payments and data management systems using smart contracts.
It was launched in October 2018, and its native tokens are ERC20 Ethereum tokens. SINCE LAUNCH, the DEFI token price has increased more than 200%, reaching an all-time high at USD 0.13 in January 2019 before declining slightly.
Decentralized finance has become one of the hottest topics in the blockchain space due to the increasing use cases of cryptocurrencies and the rapid growth rate across different blockchain networks and protocols over recent years.
An estimated $500 billion worth of cryptocurrencies are currently held by investors globally, and billions more have been generated via the mining process.
All these coins will need to be stored somewhere; some will be stored on exchanges, but most people who hold large amounts of cryptocurrencies prefer cold storage—storing their coins offline on hardware wallets or paper wallets.
For example – as it’s more secure against hacks and thefts that frequently happen across cryptocurrency exchanges globally.
But even if you store your coins securely offline, you still need a way to access them when you want to spend them. This is where decentralized finance comes into play:
DEFI protocol enables developers and businesses to build decentralized financial applications on top of it, allowing users to access their crypto assets through those apps while keeping control over them.
One important thing about decentralized finance protocols like DEFI is that they are open-source projects with no central authority controlling them.
Decentralized Finance Protocol
Interest rates are market rates not controlled by governments or other intermediaries. The protocol provides transparency, accessibility and user control over their financial data and funds on the blockchain.
To achieve these goals, DECENTRALIZED FINANCE PROTOCOL will rely on a public blockchain network to record all transactions and track all tokens associated with it.
For efficient operation of DECENTRALIZED FINANCE PROTOCOL, users will have an option of using special-purpose tokens called DEFiNITES that represent desired fiat currencies, bonds or stocks.
Using a specialized blockchain utility token, DEFiNITES can be used as a payment method in decentralized financial applications (dApps) running on DECENTRALIZED FINANCE PROTOCOL’s public blockchain network.
In addition, DEFiNITES will allow its holders to participate in voting for decentralized financial applications running on DECENTRALIZED FINANCE PROTOCOL’s public blockchain network.
The underlying technology behind DEFiNITES is Blockchain Distributed Ledger Technology (DLT). DLT is a decentralized database that allows every participant access to transaction records and accounts balances stored across multiple computers within a peer-to-peer network without requiring centralized servers or third-party intermediaries.
Transactions made through DLT are recorded chronologically in blocks creating an immutable, transparent ledger of activity available for anyone within the peer-to-peer network to see.
What Problem Does DEFI Solve?
DEFI is a decentralized finance protocol that offers transparent and censorship-resistant peer-to-peer lending, staking, betting and tokenization. With DEFI, value exchange can be replicated or done more efficiently.
Investors benefit from better price discovery and higher yields. While investors save money, borrowers also benefit from lower interest rates compared to traditional financial institutions. Borrowers will receive loans faster through more efficient mechanisms.
Unlike current centralized solutions plagued by high fees and fraud, DEFI provides an ecosystem where users can build trust without sacrificing privacy.
The DEFI platform aims at becoming an important piece of infrastructure for digital assets, smart contracts and decentralized applications (dApps). DEFI’s first step is to build its blockchain called DeFiChainTM (DFC), which will serve as a base layer for multiple protocols.
One of these protocols will be the Decentralized Finance (DEFi) Protocol which serves as a building block for all other future dApps built on top of the DFC chain.
Who Are the Key Players in DEFI?
To understand what DEFI is, you first need to understand who’s behind it. There are three key players in DEFI: The Borrower, The Lender and the Dividend Holders.
The role of each is straightforward, so let’s take a look at them individually. The Borrower has something they want to borrow, like money or an asset. They would then list their proposal on a decentralized exchange (DEX) using DEFI tokens as collateral for their loan request. From there, Lenders can lend money to borrowers by purchasing those tokens on that exchange using Ethereum (ETH).
Before the loan expires, if ETH prices increase substantially enough, they can buy back those tokens at an increased price (for example), repay their loan plus interest and keep any additional profit from selling back those tokens.
This process gives lenders two benefits:
1) interest payments paid out monthly over time by borrowers
2) capital gains from ETH appreciation during that period when buying back their collateral tokens for repayment purposes.
Lastly, we have Dividend Holders. These token holders receive dividends from all successful loans made through the DEFI protocol. These dividends are paid out in ETH every month based on a percentage of all successful loans made through the DEFI protocol that month.
For example, if $1 million worth of loans were made through the DEFI protocol in one month and $100K was distributed to token holders as dividends, token holders would receive $10 per token held that month.
If only $50K were distributed, dividend holders would only receive $5 per token held that month. However, unlike traditional dividend payouts where shareholders earn a portion of company profits, all token holders earn equally regardless of how many tokens they hold with DEFI protocol.
It’s important to note that because DEFI is open source and decentralized, anyone can build applications built on top of it. One developer already has.
The Potential Impact of DEFI
You’ve likely heard of Bitcoin, and perhaps even blockchain, but how about decentralized finance? While that might sound like something only a select few experts should be concerned with, you’ll want to pay attention.
Why? Well, there’s a good chance that many aspects of our financial world will eventually change due to what’s known as decentralized finance.
And if you’re serious about personal finances and how money influences your life, you’ll want to know more about it. The DEFI protocol is one you’ll want to familiarize yourself with.
How Will DEFI Impact Financial Institutions?
The purpose of DEFI is to protect both parties involved in a financial transaction. Using cryptography and smart contracts, both parties will know that their funds are secure, no matter what happens on the blockchain.
DEFI protects against fraud and corruption with a decentralized audit trail that keeps a detailed record of all interactions with DEFI’s coins.
In theory, both parties can feel confident in all future transactions because cryptography guarantees them. Because participants never need to trust each other or any single entity (like an intermediary), they won’t have to worry about a single person or group taking control over their money or breaching security protocols. Any user can audit the platform thanks to its open-source nature.
Why Is DECENTRALIZED FINANCE Emerging Now?
It’s no secret that blockchain technology is changing financial services as we know them. This can largely be attributed to its valuable and revolutionary underlying structure.
Since trust, security, and transparency are key factors in any financial situation, blockchain’s ability to promote all three makes it an attractive option for many organizations.
Specifically, decentralized finance protocol is a leader in providing solutions that leverage decentralized applications (DApps) and blockchain technology.
DECENTRALIZED FINANCE operates on multiple blockchains at once—not just one—it doesn’t have one point of failure. This ensures data remains secure even if one network experiences issues or malfunctions.
In short: blockchain has improved nearly every aspect of financial services, from accounting/auditing to payment processing and record-keeping, but what about investment? And what about investing in cryptocurrencies? With DEFI, you can now do both. The protocols allow users to invest in cryptocurrency while also choosing which currency they would like their profits paid out in.
For example, let’s say you invested $1,000 into bitcoin via DEFI. If bitcoin rose by 20% during your investment period, you could choose whether you wanted your profits paid out in bitcoin or another currency like USD.
Your options aren’t limited either–you could also choose between ETH, XRP, BCH, LTC, EOS, XLM, TRX, DASH, NEO and more! As mentioned earlier, DEFI provides users with access to traditional crypto exchanges without dealing with any centralized intermediaries.
Challenges Facing DECENTRALIZED FINANCE Today
The financial sector is broken. Many issues have contributed to its deterioration, but one thing is clear: there needs to change. This change can occur through blockchain technology, which ensures that cryptocurrency transactions are safe and secure.
As of 2017, there is roughly eight billion dollars worth of digital currencies in circulation, and it is projected that figure will more than double by 2020.
DECENTRALIZED FINANCE has made some progress in facilitating these cryptocurrency transactions over blockchain-based platforms like Ethereum; however, they still have a long way to go before creating a sound financial ecosystem through crypto assets and smart contracts.
It may seem impossible for such a small organization to transform an entire industry, but it’s DECENTRALIZED FINANCE if anyone can do it.
Summary and Next Steps
Decentralized finance has attracted a lot of attention recently. More precisely, there has been significant growth in distributed ledger-based solutions to streamline and secure financial transactions on existing platforms.
The most promising example of such a solution is, without doubt, Ethereum. Founded by Vitalik Buterin in 2014, Ethereum’s original purpose was to build a smart contract platform that could host applications that execute arbitrary code using blockchain technology.
Since then, it has quickly become one of if not the go-to solutions for blockchain developers seeking access to powerful distributed ledger features like permissionless transactions and programmable accounts with minimal operating overheads.
This means that any project looking to launch their token or even create an entirely new cryptocurrency can do so easily by building on top of Ethereum. However, many projects are beginning to realize that Ethereum still has some limitations that prevent it from becoming a fully decentralized and efficient open-source financial network despite all its benefits.
This is where DEFI comes into play, as they aim to be a truly decentralized alternative to centralized exchanges and provide liquidity services between DEXs (decentralized exchanges).
In other words, DEFI aims to be an ecosystem protocol similar to how ERC20 allows any developer to issue tokens while also providing users with an easy way of transferring them across different blockchains.
If you follow my Trendz on DEFI, you will understand that I am taking it gradually in other for everyone who doesn’t know Defi.
In my next post, I will discuss more on DEFI SECURITY. Don’t forget to drop your ideas in the comment section below so that we all can interact together!