DeFi stands for Decentralised Finance and refers to a financial ecosystem based on blockchain technology. Blockchain technology has become known worldwide through the digital currency Bitcoin. What most people are unaware of is that digital currencies are just a small application of what blockchain means. Bitcoin and other digital currencies are just the tip of the iceberg, the top that is visible. Most DeFi applications are built on the Ethereum platform, but there are other protocols used in DeFi applications.
DeFi aims to create an open and transparent financial environment that is accessible to all without central control and without intermediaries. DeFi includes a wide variety of financial applications such as payments, lending, interest, insurance and transactions through decentralised stock exchanges. These applications are now available to everyone through the use of decentralised blockchain networks and smart contracts.
An interesting feature of DeFi applications is the ability to synthesise different protocols for creating new services. DeFi protocols act as a software library, allowing the connection of different smart contracts, thus creating new applications. The Chainlink project (LINK) through a data-oracle system for data confirmation, promises security and reliability throughout the process. This can be especially useful for compiling DeFi applications by reducing security vulnerabilities and tackling cyber fraud.
Stablecoins are digital currencies based on blockchain technology. However, unlike Bitcoin, a stablecoin is pegged to a National currency such as the US Dollar or the Euro. Linking to a National currency means that the exchange rate is fixed at 1 Stablecoin for 1 dollar or 1 euro. Stablecoins are now rampant in Asia, where Chinese workers use them to send money to relatives in China without paying commissions and exchange rates.
A Decentralised Stock Exchange (DEX) provides the ability to exchange digital assets without the need for a trading account or intermediary. Each transaction takes place directly between the users’ wallets (blockchain wallets). A smart contract allows the automatic matching of supply and demand.
In the new world of DeFi, anyone can borrow or lend money without the need for a bank account. Everyone’s digital assets are used as collateral in case of default. DeFi offers significant advantages to lenders and borrowers over traditional banks.
Staking is similar to earning interest through a savings account at a commercial bank. However, it involves a different process without a bank account. At present, this process only applies to validators of an encryption project who, in return, are rewarded with interest.
Decentralised insurance services
DeFi creates new opportunities and new data in the insurance industry. For example, take the introduction of Peer-to-Peer insurance. P2P insurance operates as a human-centered risk-sharing network. A group of people come together to insure against a common risk, without the participation of an insurance company. Blockchain insurance offers significant benefits to customers, such as fast transactions and full transparency.
According to the World Bank, there are more than 1 billion people without a National Identity worldwide. In poor countries, 1 in 2 women do not have an ID, so, as a result, they have limited access to basic economic and political activities. However, many of these people have access to a cheap smartphone. Therefore, a decentralised identity can play an important role in these underdeveloped countries.
DeFi payment services aim to create an open payment ecosystem without centralised control and without the need for a bank account. Decentralised payment services are very promising for the people of the earth without access to banking services.