The Rise of Decentralised Finance (DeFi): What You Need to Know

October 31, 2024

DeFi has made a big leap toward a new financial horizon. Decentralised finance (DeFi) has democratised finance by replacing centralised institutions with P2P connections to provide a full spectrum of financial services.

We have already witnessed exponential growth within DeFi with total value locked (TVL) in protocols going beyond billions of dollars. This growth rate can be attributed to many factors including the rising popularity of decentralised applications (dApps) and decentralised exchanges (DEXs). Attend the Global Blockchain Show to know more about DeFi-related topics.

Read ahead to understand the fundamentals of DeFi, and how they are beneficial to all those who are involved in the financial world.

What is DeFi?

Decentralised financing (DeFi) is open to all. It allows users to earn interest, lend, borrow, and trade assets faster than any other third party. P2P transactions within DeFi are executed programmatically based on predetermined conditions via smart contracts.

The pieces of code on smart contracts are executed on blockchain networks. Any application that developers build with smart contracts is called a decentralised application (dApp). dApps are vital for users in the crypto and blockchain world.

Key Components of DeFi

Decentralised Exchanges (DEXs): We have already used centralised exchanges as an efficient way of trading crypto but many traders prefer the basic crypto characteristic of decentralisation. Through DEXs, traders can exchange their digital assets directly from crypto wallets without any centralised party connecting the buyers and sellers. You can use protocols like Uniswap and SushiSwap for trading cryptocurrencies on DEXs.
Stablecoins: Stablecoins are cryptocurrencies but are pegged to stable assets like the USD. Cryptocurrencies have fluctuating and unpredictable prices which can make trading difficult and sometimes incur losses. Stablecoins, however, tackle price fluctuations as they are tied to more stable assets. USDC and DAI are examples of stablecoins.
Lending and Borrowing Platforms: DeFi also serves as a lending and borrowing platform. Digital assets are lent for interest or borrowed against collateral on DeFi. We recommend our readers use DeFi exchanges for faster transactions at lower costs as they operate without intermediaries. Compound and Aave are some examples of DeFi lending and borrowing platforms.
Yield Farming & Staking: DeFi platforms are also used for yield farming and staking. They offer different risk-reward profiles for investors to earn passive income. Profits can be earned through yield farming but with higher chances of technical vulnerabilities. Meanwhile, staking offers lower yet steady profits for supporting DeFi security. Through both yield farming and staking, users can earn rewards in additional tokens.
Insurance Protocols: Insurance protocols cover vulnerabilities in smart contracts, unlike traditional insurance. DeFi insurance protocols are popular for their mutual risk-sharing arrangements that do not require any centralised financial intermediaries. One example of insurance protocol is Nexus Mutual.

Benefits of DeFi

Financial Inclusion: Financial inclusivity is one of the key goals of DeFi. The new tech encourages organisations to reach the unbanked and underbanked markets that traditional financial institutions often tend to overlook.
Cost Reduction: DeFi eliminates both intermediaries and automated processes via smart contracts. This reduces transaction costs for organisations and traders. When it comes to DeFi, payment processes and asset management can be streamlined which leads to cost-saving and operational efficiencies.
Enhanced Security: DeFi makes sure users get higher levels of security through decentralised consensus mechanisms and cryptographic protocols. Transactions are recorded on a public ledger to provide immutability, transparency, and reduce manipulation.
Accessibility: The primary benefit of DeFi is increased access to financial markets and services. DeFi protocols, as we all know, run on a global scale without any restrictions imposed by traditional banking hours or geographic boundaries. This global accessibility helps the market to expand further and facilitate faster cross-border transactions.
Transparency: The use of blockchain provides higher levels of transparency. The transactions are recorded on public blockchains so that users can track and verify their financial activities at any point. DeFi protocols also use smart contracts to provide a secure foundation for organisations thereby, minimising risks of fraud and improving accountability for business operations.

Future of DeFi

The future of DeFi is bright with limitless potential and possibilities to further disrupt financial sectors. With the advancement of technology and the rising adoption of DeFi crypto, we can only expect to witness more innovative services and solutions. DeFi will soon be integrated with conventional financial systems to provide financial inclusion to the unbanked and underbanked populations and democratise access to financial services at a faster rate. The interoperability attribute of DeFi services will further reinforce the cross-blockchain networks as they are adopted on a global level. Overall, the future of DeFi is full of potential, playing a significant role in shaping the financial landscape.

Stay ahead of DeFi trends and explore them in depth at the Blockchain Conference in Dubai, December 12-13, 2024. Connect with industry leaders and discover the future of decentralized finance.

Conclusion

The rising popularity of DeFi has considerably affected the crypto exchange landscape, bringing new possibilities and challenges. While it has experienced rapid growth, it constantly faces several challenges, including smart contract vulnerabilities, scalability issues, and regulatory uncertainty. However, DeFi’s potential benefits such as innovation and financial inclusion have made it a promising sector with a potential future. As the technology continues to evolve, it is most likely to offer a more inclusive and decentralised alternative to traditional financing, bridging the gap between the banked and the underbanked populations around the world.