DeFi Components: Understanding Decentralized Finance

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Will DeFi really have a meaningful impact in the world of Finance or is it just hype?

according to this Crypto Briefing article

“Roughly 270 projects emerged from this month’s ETH Global hackathon, revealing a key theme for the crypto community: DeFi is far from over.”

In this article we are going to look at the different components that make or break a DeFi app and we are going to learn how we can put this technology to use in our own projects.

Before we get into it let us cover some basics on Decentralized Finance.

Decentralized finance (or DeFi) is an experimental form of global finance that relies on blockchain technology to effectuate most of the financial transactions we commonly execute through centralized brokerages, banks or exchanges.

DeFi apps or dApps allow users to lend and borrow funds, trade assets using derivatives, trade cryptocurrencies, and earn insane interest with some providers offering triple-digit interest rates.

As of November 2020 the investment in DeFi protocols has grown 10X to over 11 billion USD.

dApps makes use of the Ethereum blockchain and programmable Smart Contracts to make peer to peer transactions without the need of an exchange.

This makes Ethereum the first crucial component of the current DeFi landscape.

Using the Ethereum blockchain we can write code in solidity that automates financial services in a decentralized manner.

These automated financial services are called smart contracts.

If you want to learn how to write and deploy your own smart contracts in solidity check out this article I wrote on how to do just that!

In our smart contracts we can determine the rules of a how our financial service will work and deploy them to a digital ledger or blockchain.

One important thing to know about deployment is that once a contract is deployed it is immutable.

So Ethereum today serves as the infrastructure of our DeFi system.

The second most important component in our system is perhaps even more important the the infrastructure itself;

Cash!

Ether of course is the crypto-currency of Ethereum network and will serve as the basis for our decentralized financial services.

Ether however, like most crypto-currencies is quite volatile, and won’t provide the stability that most users expect from their financial service providers.

Luckily we can get around this problem with the use of stable coins!

Stable coins are designed to minimize or eliminate volatility and are usually pegged to a fiat currency like the USD.

There are stable coins backed by other crypto-currency collaterals such as DAI.

DAI is essentially an ERC-20 Token written in solidity and deployed on the Ethereum blockchain.

Making it a completely decentralized stable coin, and a perfect store of value to use in your own dApps.

With decentralized infrastructure and money in place, we are ready to talk DeFi services!

The most sought after of DeFi services is currency exchange.

DEX or Decentralized Exchanges use smart contracts to allow users to buy, sell, or trade crypto-currencies.

They run on the Ethereum platform and are completely autonomous.

These smart contracts execute trades, safely handle funds, and enforce the DEX rules.

With them there is no need to move funds into an exchange account in order to trade.

services like 0x allow you to deploy a decentralized exchange in minutes allowing you to test your smart contracts with ease!

Another DeFi component that is booming is the decentralize money market!

Some dApps connect borrowers with lenders and and use cypto-currencies as collateral.

The terms for this loans are also written in smart contracts that autonomously manage interest distribution and loan terms.

This form of lending is colloquially called yield farming which is recently gaining tremendous popularity among unconventional investors.

There are even DeFi money markets insurers who will insure your dApps loans.

So far we have covered some of the many benefits to DeFi investing, like a decentralized infrastructure, decentralized money, and even decentralized financial services like borrowing, lending, and insurance.

However act with caution when making moves as an investor in this field because as you know this is all pretty new and we are all still learning how things work under the hood in this fascinating space.

If you are a programmer remember to follow for future blockchain programming related content.

As always I hope you learned something new, and thanks for reading! Wishing you luck in your investment ventures, Until the next one!

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