You may be hearing the term “DeFi” a lot, especially in terms of cryptocurrency. DeFi is the colloquial term for “decentralized finance.” It refers to financial applications built on blockchain technology, an area within the blockchain that provides a decentralized version of conventional financial services.
As an alternative to traditional banks, exchanges, and insurance companies, DeFi use “smart contracts” on blockchains. IBM defines smart contracts as, “programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.”
DeFi not only offers access to typical financial services like borrowing, lending, saving, exchange, and insurance, it also provides a platform for innovation. Most DeFi apps are build on the Ethereum blockchain. It is open-source and permissionless. Users interact with each other without the need for banks, brokers, lawyers, and other middlemen as is typical in traditional financial institutions.
These are some of the most popular DeFi applications:
Stablecoins - Stablecoins, as the name suggests, offer stability within the crypto space. They are benchmarked to a fiat currency such as the US dollar or to a commodity like gold or oil. Tether, USD Coin, and Binance USD are some examples of stablecoins.
Decentralized exchanges – Decentralized exchanges or DEXs are peer-to-peer (P2P) crypto exchanges where the users transact directly with each other. The most popular DEXs are Uniswap, PancakeSwap, and Sushiswap.
Lending and borrowing – Crypto owners who want liquidity in other currencies can borrow money by using their digital assets as collateral. Individuals can lend their crypto deposits to borrowers with interest. Additional perks of DeFi lending and borrowing are that anyone can take a loan without KYC and has little documentary requirements. The top platforms for this are Aave, Maker, Uniswap, Compound, and InstaDApp.
Prediction markets – Prediction markets offer odds of winning by modifying the structures of bets that range from sports to politics to stock prices and more. Augur, Gnosis, and Omen.eth are examples of prediction market platforms.
Asset management – Asset management on DeFi makes investing faster, less expensive, and more accessible. Balancer, Curve, and DeFi Saver are some of the leading asset management projects.
People use DeFi for its accessibility, low fees, high interest, increased transparency and security, and autonomy. As it is still in its initial stages, DeFi it has its share of risks in terms of technology, asset, and product. There can be errors in a developer’s code, which can make it an open season for hackers. Victims of fraudulent transactions have no recourse as DeFi platforms generally have no provision for means to recover lost money. Just like any other financial transaction, it is highly recommended for crypto enthusiasts to do a thorough research before jumping into any of the DeFi apps.
It is highly likely that DeFi will continue to evolve. Supporters of DeFi see that it will be a global financial system worldwide. CoinShares Chief Strategy Officer Meltem Demirors predicts that DeFi will have high-yield savings accounts and new decentralized financial products and services. Other industry experts see that DeFi will reshape the financial industry.
To date, Monero users can get into DeFi by exchanging their XMR or ETH to a Wrapped Monero (WXMR) on BTSE or Uniswap. As an ERC-20 token however, Wrapped Monero will be limited to the privacy that the Ethereum network provides.
As a Monero owner, you will need to have secure crypto wallets to keep your XMR in, whether you intend to go into DeFi or not. There is a great deal of hot and cold wallets available for each type of crypto asset and it’s highly recommended that you have both kinds. If you’re looking for an open-source web-based Monero wallet, sign up for an XMRWallet. It enables you to have faster, easier, and uninterrupted Monero transactions.