Let's take a trip back to the 1950s when the first credit card was invented. It seemed quite bizarre that a single card could eradicate the need for all paper money but it did. Similarly, the ATM was first unveiled to the public in the 1970s; again, this blew the minds of the public as they were fascinated by the machine that saves you the hassle of going to the bank. Recently, our payment methods have become much more efficient with the use of e-banking and payment gateway apps such as Paytm and Razorpay. Now how does this all link into Defi(Decentralised Finance)?
Well, Defi is the new revolution for payments and for the economic world as it consists of smart contracts, cryptocurrencies and protocols completely based on the Ether servers. This revolution and the Decentralized Apps(DApps) created are often referred to as “money legos” as they build upon each other and help elevate the economic industry for finance using various protocols and contracts available online.
Well, what makes this different from all the pre-existing brick and mortar banks? Decentralised finance relies on cryptocurrencies and open ledgers hence allowing everyone to see the transaction details and this creates a level of transparency, which cannot be matched by the current banks. With the introduction of smart contracts that are stored in a blockchain system, these transactions are not only set in stone, well set in the block, as they cannot be edited after being stored permanently within the blockchain but also is visible by everyone on the ledger while keeping the personal details private. I’ve explained the role of public and private keys on my blog about bitcoin. Using these various protocols, one may make payments, transfer money and complete economic tasks without leaving the comfort of their home.
A large proportion of Defi consists of firms revamping the industry of lending and loaning through different protocols and different ideologies. An extremely unique example of this is a firm called compound that works by allowing users to give their cryptocurrencies and earn an interest in whatever they have stored in the ‘lending pool’. These lending pools create a decentralised non-collateral based lending and borrowing system that augments the economic growth by making loans so much easier.
Decentralised finance has also inspired the creation of one of the first-ever cryptocurrencies that are pegged to a fiat currency. Normally treated as assets, cryptocurrencies always have fluctuating prices but with the creation of the firm maker DAO, who have created various cryptocurrencies under the labels DAI/ETH or DAI/USD; these cryptocurrencies are pegged to values of other currencies or cryptocurrencies and hence eradicate the primary problem that arises with most decentralised exchanges. The DAI is just one example of the solutions created by the creation of Defi.
But the story doesn’t end there with decentralised finance. Stay tuned to hear more.