Based on the utility of the cryptos, these could be broadly classified into four categories. These are DeFi, NFT, utility tokens, and yield farming. While we have discussed cryptocurrencies and the NFTs in the previous 2 blogposts, let’s endeavour to understand - what is decentralised finance (DeFi)?
What is DeFi: The full form of DeFi is decentralised finance, which uses blockchain or secure distributed ledger technology similar to the one used by the cryptocurrencies. The gaining momentum in the popularity of cryptocurrencies - which functions on the back-bone of blockchain technology - has provided impetus to innovations giving rise to its adoption by DeFi organisations. DeFi makes use of emerging technology without involvement of intermediaries in the financial transactions.
Blockchain Technology: It would be interesting to understand the coining of the term blockchain. Under this technology, transactions carried out are recorded in blocks, which are then authenticated by other users. If these verifiers reach on a consensus, the block is closed and encrypted. Thereafter, next block is created containing information about previous block within it. These blocks are chained together through information available in each preceding block, thereby calling it as blockchain.
Benefits of DeFi: DeFi ecosystem could be used for buying products and services besides remittance of funds. These platforms facilitate earning interest on crypto holdings as well as borrowing funds. The primary goals of DeFi are - users get access to financial services and transactions get executed on real-time basis. Another benefit is elimination of transaction costs that is charged by intermediaries for using services, in centralised finance. The crypto holding could be kept in a secured digital wallet. No approval is needed for accessing DeFi by the user or consumer, having internet connectivity.
The constituents of tech DeFi are open protocols, public smart contract platforms like Ethereum blockchain, decentralised exchanges, and stable-coins that facilitate the development of applications (dApps). The infrastructure support for DeFi and regulations governing virtual digital assets (VDAs) are in the process of getting formulated post discussion with stakeholders - which are still under various stages viz. exploratory, consultative, development or finalisation.
Please keep watching this space for more information in the cryptocurrency space!
Superbly explained.