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What is Decentralized Finance (DeFi)?

Started by Charlesth, Jul 28, 2022, 11:43 AM

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CharlesthTopic starter

The cryptocurrency world began with Bitcoin, which is well-known even to those who have been living in isolation for the past few years. However, the emergence of the ether blockchain, with its ability to create smart contracts, led to the growth of the decentralized finance (DeFi) ecosystem.



 However, Ethereum's limited throughput has led to the development of alternative blockchains such as Solana, Tera, and Avax, which support thousands of transactions per second and reduce transaction costs significantly. As a result, the share of Bitcoin in the total funding of cryptocurrencies has decreased from 90% in 2017 to about 40% today.

The DeFi market, which comprises various applications and services based on smart contracts, has a total investment capitalization of around $230 billion and has grown tenfold over the past year. One example of a DeFi implementation is staking, where you buy tokens and give them to validators in exchange for part of the fees paid by blockchain users and potential earnings or losses from token value changes. The staking yield for LUNA tokens is currently 7% per annum, making it a relatively conservative form of return in DeFi.

An example of a real-world DeFi implementation is the CHAI payment card in South Korea, which is accepted by taxi drivers and offers faster and cheaper transactions compared to other cards. The card is connected to the Terra blockchain, and fees paid by card users contribute to the income of LUNA token stackers.

This shows how DeFi is starting to expand beyond cryptocurrency speculation and impact traditional finance systems. Self-custody and low cost are two advantages of DeFi, but also come with the risk of scams and hаckers. DeFi also offers a global market for financial services and capital, without any geographic restrictions.
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searchcandy

Why would someone provide $250 worth of LUNA token as collateral to get a loan of $100 and pay interest on it? Why not sell half the tokens on an exchange to get the same amount of money without taking a loan?
Personally, there is a psychological barrier towards cryptocurrencies, as they seem to exist in a parallel universe while I am living my daily life buying necessities like bread, milk, and paying for transportation. Until these worlds intersect, my personal situation is unlikely to change.
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gstarspas

The main concept of DeFi is to create an autonomous and transparent financial ecosystem that operates independently from regulators and human intervention. DeFi enables finance to be accessible to everyone, allowing users to conduct transactions and address financial issues directly with each other without intermediaries such as banks or brokerage organizations.

The decentralized system allows buyers, sellers, lenders, and borrowers to interact through software, program codes, and encryption algorithms. The distinction between centralized (CeFi) and decentralized financial systems is the reliance on either people or technology to achieve their objectives. Despite the recent major attack on Poly Network, DeFi has boomed during the coronavirus pandemic, with billions of dollars added to the market monthly. Vitalik Buterin, founder of Ethereum cryptocurrency, stated that the accessibility of a system where anyone around the world can make transfers and select financial risks is a powerful idea that was previously unavailable to many.
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gromofinance

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keith.bowman

Decentralized Finance, or DeFi, is a rapidly growing ecosystem that leverages blockchain technology and cryptocurrencies to create a decentralized alternative to traditional financial services. Unlike the centralized model of the conventional financial system, DeFi operates on a decentralized network, where users interact directly with each other and with various DeFi protocols, without the need for intermediaries such as banks, brokerages, or other financial institutions.

At the heart of DeFi are smart contracts, which are self-executing, programmable agreements stored on a blockchain. These smart contracts enable the creation of a wide range of financial applications and services, including:

1. Lending and Borrowing: DeFi platforms allow users to lend and borrow cryptocurrencies, often with the use of collateral, without the need for a centralized institution. This provides access to credit and liquidity for individuals and businesses.

2. Decentralized Exchanges (DEXs): DeFi-based decentralized exchanges facilitate the trading of cryptocurrencies and other digital assets directly between users, without the involvement of a centralized exchange.

3. Stablecoins: DeFi protocols have developed stablecoins, which are cryptocurrencies designed to maintain a stable value, often pegged to fiat currencies or other assets. Stablecoins play a crucial role in providing price stability within the DeFi ecosystem.

4. Derivatives: DeFi platforms offer a range of derivative products, such as futures, options, and swaps, allowing users to manage risks and speculate on the price movements of cryptocurrencies and other digital assets.

5. Asset Management: DeFi protocols offer decentralized asset management services, enabling users to pool their funds, diversify their investments, and earn yields on their holdings.

6. Insurance: DeFi-based insurance protocols provide coverage for various risks, such as smart contract failures or losses from hacks, offering users a way to protect their digital assets.

The key benefits of DeFi include:

1. Accessibility: DeFi platforms are generally open-source and available to anyone with an internet connection, promoting financial inclusion and empowering individuals who may have limited access to traditional financial services.

2. Transparency: Transactions and financial records in the DeFi ecosystem are recorded on the blockchain, providing a transparent and immutable ledger that can be audited by anyone.

3. Resilience: By eliminating single points of failure, DeFi systems are more resilient to centralized attacks or failures, as the network is secured through decentralized consensus mechanisms.

4. Innovation: The modular and composable nature of DeFi protocols allows for rapid innovation, with new financial applications and services being developed and integrated into the ecosystem.

However, DeFi also faces challenges, such as regulatory uncertainty, liquidity risks, smart contract vulnerabilities, and the need for better user interfaces and educational resources to improve adoption.

Despite these challenges, the potential of DeFi to transform the financial landscape is immense. As the technology matures and the ecosystem continues to grow, DeFi could play a pivotal role in creating a more inclusive, transparent, and resilient financial system that empowers individuals and fosters financial innovation.
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