DeFi: Decentralized Finance

Decentralized finance (DeFi) is a type of digital finance process which is decentralized and does not rely on intermediaries such as banks, exchanges, and other centralized entities. It is considered the future of finance in which transactions are executed in real-time without third parties by using blockchain technology using the power of smart contracts. It aims to offer similar banking and financial services such as lending and borrowing, trading, etc.

How Does Decentralized Finance (DeFi) Work?

Decentralized finance works on dApps or decentralized applications to manage transactions and run the blockchain. People can use dApps to execute financial transactions without any third party. The transactions are stored on blockchains that are secure and can’t be altered. Instead of fiat, the transactions are executed in cryptocurrencies.

The popular types of DeFi applications include decentralized exchanges, stablecoins, lending platforms, wrapped Bitcoin, and prediction markets. Most of the dApps are built on the Ethereum blockchain.

According to DeFi Pulse, the top dApps are Maker for lending, Uniswap for decentralized exchange, Aave for lending, dYdX for derivatives, Tornado Cash for payments, and PancakeSwap for decentralized exchange. All are built on the Ethereum blockchain, but Bitcoin Lightning is built on the Bitcoin blockchain for payments.

The decentralized finance platforms have their own tokens which are termed as DeFi tokens. Some of the top DeFi tokens are Dai, Wrapped Bitcoin, AAVE, Maker, and Lido DAO.

The Future of DeFi Adoption

DeFi adoption gained pace in mid-2020 with the total value locked (TVL) reaching almost $100 billion in 2021 end. The DeFi market has declined since then due to hacks, liquidity crises, and regulatory burdens.

The future of defi lending and borrowing will depend on appeal from people, government support, and solving liquidity challenges.

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Disclaimer

Varinder has over 10 years of experience and is known as a seasoned leader for his involvement in the fintech sector. With over 5 years dedicated to blockchain, crypto, and Web3 developments, he has experienced two Bitcoin halving events making him key opinion leader in the space. At CoinGape Media, Varinder leads the editorial decisions, spearheading the news team to cover latest updates, markets trends and developments within the crypto industry. The company was recognized as Best Crypto Media Company 2024 for high impact and quality reporting. Being a Master of Technology degree holder, analytics thinker, technology enthusiast, Varinder has shared his knowledge of disruptive technologies in over 5000+ news, articles, and papers.

The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.

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