DeFi is now one of the hottest topics in the crypto space and fast-growing sectors in the crypto industry. In this guide lets, we can look at What is DeFi and how it works?
Decentralized Finance is commonly known as DeFi built on a top blockchain network especially in Ethereum. Ethereum is an open-source global, decentralized blockchain platform so that’s why only the Ethereum blockchain platform is the primary choice for the DeFi application.
Explore more here - What is Ethereum Blockchain and It’s primary Use Cases!
DeFi is an open-source and transparent financial service ecosystem it can be suitable for everyone and operate without any central authority. Users can easily interact with this ecosystem through peer-to-peer (P2P) and decentralized applications (dapps).
“DeFi is offering you to control of your own assets”
DeFi is also known as open finance platform, it covers end to end financial services which include lending, borrowing, and trading under decentralized infrastructure such as smart contracts and immutable blockchain technology. DeFi can be combined, modified, and integrated according to your needs.
DeFi mainly involved in smart contracts. A smart contract is a virtual contract that is built by using the blockchain platform for immutability and security purposes. It is an agreement between one to others in the form of computer code. Terms and conditions are drawn according to the authority of people. All the information is stored in the public database once the information can store and it cannot be changed.
Using a smart contract is faster, easier, and reduce the risk for both parties, Smart contract also indicates the loan terms and it connect lenders and borrowers.
Explore more here - What is Smart Contract? How does it work?
DeFi platform-based application does not need any inter-mediators or a third party.
Today nearly all DeFi based projects are being built on Ethereum and making it the standard default blockchain for many dapps.
DeFi platform-based applications generally allow that the user remains in possession of the private keys. The user is in full control of the money without a trusted of third party.
DeFi is currently a space of innovative experimentation instead of professional financial operations.
By using DeFi, the cost is significantly reduced and low-income individuals can also benefit from a wide range of financial services.
Most of the DeFi applications are decentralized exchanges (DEXes). These platforms allow the user to trade digital assets without the need for an intermediary to hold their funds. The trades can be easily done with smart contracts.
DeFi is flexible for user experience, anyone can create DeFi apps and anyone can use them. Users interact directly with the smart contracts from their crypto wallets.
Generally, decentralized exchanges have lower trading fees compared with centralized exchanges.
ref: Dapp University
MakerDAO is the most popular DeFi based Dapp that allows anyone to get the loan without third parties at a crucial time.
The second most used DeFi based project today is the Compound finance network, a crypto lending market place that allows peoples to get the best lending and borrowing solutions without the need of third parties. This network operates its money market via a smart contract.
Dharma is a semi-centralized peer-to-peer(P2P) lending/borrowing platform based on ethereum. This platform supports USDC, ETH for collateralization. The interest rate can differ for each coin. It allows users to lend and borrow coins for 90 days at a fixed interest rate.
Defi insurance holds a vital role in securing fund of the user, It helps more investors into the DeFi Space.
It allows the users to take out insurance policies on smart contracts, funds, or any other digital asset
Improved international money transfers
If you are sending or receiving money across the world is normally more expensive. But by using the DeFi it would be able to significantly reduce the transaction fee.
According to the tax implication, every country has different tax implications for its lending system. By using DeFi in the lending system, it would be able to reduce the interest and transaction fee rates and store all records under the blockchain.
Better for loan management
Actually, peoples could not take a loan without the involvement of a bank or similar fintech service, it requires a credit score or banking record in order to be eligible to borrow money.
In DeFi, it connects lenders with borrowers more easily, allowing credit checks and digital assets to be transfers quickly and easier.
Stablecoins is also one of the key parts of the DeFi platform:
Yes, Stablecoins are digital assets it’s pegged to real-world assets to ensure their stability, Stablecoin can be backed by any fiat currency, asset or commodity.
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