Decentralized Finance is a concept that has emerged in the last two years. The idea behind decentralized finance is to make use of distributed ledger technology (DLT), and its off-chain components such as Internet-based ledgers to function as an online payment system. With such a system, the collection of participants is enabled to transact without being restricted by the speed of the network connection or the storage space of electronic data. In fact, such a system can be configured to operate efficiently even with minimal technological setups. Also, it enables users to control their own funds by allowing them to control their privacy, security, as well as the transfer of funds.
An emerging wave of DeFi protocols took previously glitchy and hard-to-navigate decentralized apps and exchanges, such as EtherDelta, and transformed them into high-volume, high-yield unicorns that provided crypto investors with consistently high returns on a regular basis. In terms of total value locked (the value of the assets committed to the protocol), transaction volume and market capitalization, many DeFi platforms and their associated tokens now rival the top centralized exchanges.
Figuring out the point at which decentralized finance began almost always ends up in a rhetorical debate. Some argue that Bitcoin’s (BTC) invention a decade ago marked the start of it, as the major cryptocurrency was the first peer-to-peer digital money and represents the conceptual core underpinning DeFi. Others say — and would be technically correct in doing so — that DeFi started back in December 2017, when Ethereum-based protocol MakerDAO was launched, followed by Compound Finance and Uniswap, released in September and November 2018, respectively. On the other hand, it wouldn’t be a stretch to say that DeFi’s true ascent started in 2020.
In decentralized finance, tokens serve as a form of currency. There are several ways in which tokens may be implemented in such systems. First, users may issue tokens which represent ownership of a certain amount of the digital currency i.e. tokens may be issued as e-assets.
Another way of implementing decentralized finance is through Proof of Stake (POS) protocol. Through this protocol, one can build a decentralized financial system by risking one’s own money in the exchange market in return for rewards in the form of dividends. One of the advantages of using this form of lending is that it gives access to a wider range of lenders; however, the downside of this is that there is a high risk associated with such a system since it makes it more difficult for smaller businesses to obtain traditional funding sources. Also, it requires that the borrower has a long history of paying dividends to ensure sustainability of the financial system. In order to build a sustainable financial system that will work for a long time, it is important to find a system that uses Proof of Stake as a base.
Because the distribution chain is unidirectional and allows all parties to participate in the execution of the programs contained within the platform, it is not possible for one individual, such as a broker, to tamper or interfere with this process. Therefore, DEFI and Cryptocurrency are two sides of the same coin: a robust, highly regulated, and completely trustless system that offers all participants tremendous protection. DeFi is a very important aspect of any smart contract based ICO, and all companies are rushing to capture their slice of this rapidly growing industry.