Over the last few years the DeFi movement has been steadily growing in popularity. But many people still aren’t quite sure what it is, and frequently confuse it with cryptocurrencies and other blockchain applications.
“What is DeFi Really?”
To be clear, ‘DeFi’ is actually short for ‘decentralized finance’. It is a movement that is inspired by (and uses) blockchain technology to create a financial system that is decentralized and not dependent on intermediaries or central authorities. You can join the course created by Dchained which is a perfect guide for those who want to get into DeFi.
Most DeFi apps (also known as dApps) are built on Ethereum – in part due to the fact that it is the second-largest cryptocurrency. However the main reason Ethereum is the most popular DeFi platform is that it uses smart contracts to automatically execute transactions based on fixed rules.
“Why is DeFi Important?”
Now that you know what is DeFi, you may be starting to realize why it is so important. Simply put, DeFi could very well be the future of finance – and for good reason.
Compared to traditional financial services and institutions, DeFi has several advantages that set it apart:
- Permissionless with no intermediaries that can restrict access to financial services.
- Transparent due to the fact that all transactions and activity are public on the distributed ledger.
- Immutable by using smart contracts and other algorithms to conduct transactions.
- Cost-effective with lower fees due to the lack of middle men.
- Accessible to people from all over the world including groups that conventionally have low access to financial services for various reasons.
- Secure from fraudulent activities and scams due to its transparency and immutable contracts.
- Time-saving as transactions can be conducted quickly with just a single click.
All in all DeFi is able to overcome many of the weak points of the traditional finance system. While it may not be perfect and still has many challenges that need to be overcome – its potential is undeniable.
Common DeFi Use Cases
As DeFi’s popularity has skyrocketed, more and more dApps have joined its ecosystem. Some of its more common use cases right now are:
- Decentralized exchanges
- Open lending protocols
- Stablecoins
- Open marketplaces
- Prediction markets
One common misconception about DeFi is that it is a tool to make money – which it is not. That said, there are opportunities to make money with DeFi via yield farming, loaning out money, or investing in particular dApps.
“Will DeFi Go Mainstream?”
Despite the fact that DeFi has grown by leaps and bounds, it is still definitely far from being ‘mainstream’. And more importantly it is difficult to say exactly when it will be able to make that leap.
In order for DeFi to become mainstream, its apps need to attract far more users. Additionally it needs to tackle some of the issues that it faces such as security and stability.
For now, DeFi is best described as being in a state that has a lot of potential, but is still experimental. The introduction of Ethereum 2.0 along with more apps starting to mature may give an indication of what to expect from it in the years to come.