DeFi
Historical background
Throughout the history people were trading goods in exchange for services. Together with development of human kind, importance of currency arose. We invented currencies to make exchanging and trading easier. Currencies at the same time require someone to control the use and production of it. Authorities such as central banks and different financial institutions (banks) were established with a goal of managing and regulating supply of currencies that is being available for circulation.
With growing importance of currencies, the power that authorities possess has also increased rapidly. Central banks can print money whenever they decide to do so. People have to trust them with their decisions. At the same time, most of the population uses different banks to store money or invest it. Banks are therefore gaining control of all that money in exchange for small interest rates. That is why DeFi is becoming more and more popular topic.
What is DeFi?
DeFi is currently one of the most popular topics in crypto. It is an abbreviation for decentralized finance. One referring to DeFi will usually think of digital assets and different financial smart contracts. Besides that, phrase decentralized finance also stands for various protocols and decentralized applications, all mostly build on Ethereum network. All in all, DeFi represents financial software, which is built on the blockchain. It is a system that offers different ways to develop and build financial tools and services, while being decentralized and with an ability to modify when needed.
DeFi at the moment represents decentralized finance, which can play the role of financial instruments, while all being decentralized and without any governing body. The goal of DeFi is to try and recreate banking system, which could be used by the society. It could enable people full control over their assets, while at the same time giving an option for upgrades and collaboration, with which new financial products could be made.
Why DeFi?
DeFi mainly became popular due to the fact that offers you control over your assets. Its aim is to create a financial system that is available to everyone and anyone can use, while at the same time mostly excluding central authority out of it. Blockchain allows everyone to verify and check a transaction that occurs, therefore eliminating the need for 3rd parties.
Banks and different financial institutions are at the moment trying to give their users control; however, they are still the ones managing your funds. Main purpose of DeFi is to give users complete control of their assets, mostly due to blockchain technology and decentralization. Due to the fact that protocols are available to anyone (open-source), many developers are trying to build new apps and financial products with a goal of making better products that offer more security. The growing popularity of it also leads to innovation and faster development. Anyone using the DeFi can store or invest their assets in blockchain securely, while at the same time also earning a higher return on their investment in comparison to the traditional financial systems that the majority still use. As already mentioned, there is no need for a third party to handle the assets and you have your own control over the investment.
DeFi Products and application
There are various products available that involve DeFi. They are all representing open finance system using blockchain technology and several open protocols which are being integrated into financial structures.
Open Lending Protocols is a well-known digital money landing platform built on a blockchain. Due to use of Dai and some other peer-to-peer protocols Open Lending Protocols have become very popular in open finance sectors. There is a similar role to banks. User deposits their money to the platform where someone else can borrow it. In exchange users receive interests. Instead of having third parties involved that would act as an intermediary, smart contracts are the ones that determine the usual terms such as repayment time and payment of interest. Since there is no third party involved the interest rate can be higher than usual, while at the same time also being more transparent, since it uses public blockchain.