A cryptocurrency is a type of digital currency that operates as a medium of exchange across a computer network without the need for a central maintenance organization. A public, decentralized means of trade, which served as a significant stimulus for their development, is reflected in this definition of cryptocurrency. Following a severe financial crisis in 2008, the world’s first decentralized cryptocurrency, Bitcoin, was introduced. It runs on the blockchain network. Many additional cryptocurrencies (including Litecoin, Etherium, etc.) followed suit during the ensuing years, but they failed to achieve their primary goal of serving as a widely accepted alternative form of exchange to the currencies issued by banks and governments.
Cryptocurrencies needed to function like physical currencies in the real world if they were to be adopted broadly by regular people. This resulted in the development of digital goods that could be traded using cryptocurrencies, such as NFTs (Non Fungible Tokens) and game items. The development of tools to bring conventional financial services like loans, insurance, and exchange to the decentralized realm of cryptocurrencies went hand in hand with the emergence of digital commodities (DeFi). A meaningful universe of entities with value and functions is emerging from the initially isolated, arbitrary currencies as a result of the ongoing quest to make cryptocurrencies a practical method of carrying out financial transactions and the subsequent encapsulation of that idea as DeFi.
The value of DeFi
Although the concept of “DeFi” has been known for a while, the name was first used in a 2018 communication between Etherium developers. DeFi promises to provide financial services via peer-to-peer transactions on the blockchain. Consumers in centralized finance must go through numerous financial middlemen in order to obtain any financial service, including borrowing money and trading stocks and bonds. DeFi’s primary benefit is that it does away with these middlemen in financial transactions, enabling interested parties to directly exchange financial services in a transparent, approachable, and open manner. Total Value Locked (TVL), a measurement of transaction value for DeFi, increased by 14x in 2020.
How DeFi concepts are expanding the crypto ecosystem
1. Practical Use cases
Most individuals initially perceived cryptocurrencies as limiting, arbitrary, wishful thinking goods with little practical application. This was because they were unregulated and hence lacked support from any reliable institutions. By encouraging the development of crypto-supported services and agencies that may genuinely help people in the real world, Defi altered the entire narrative. These services include decentralized insurance platforms where users pay cryptocurrency premiums to get risk coverage on real world or blockchain property (Nexus Mutual), monetized blockchain gaming that generates real world jobs (Bitsport), and crypto-backed loans where users deposit cryptocurrency as collateral to take loans (BarnBridge). Cuba recognized Bitcoin as a form of legal tender due to this usefulness.
2. Stable Coins
Stable coins are cryptocurrency with constant value because it is linked to a real-world good or money (like gold). In order to address the volatility (continuous rise and fall in value) issue with cryptocurrencies, stable coins were introduced . Facilitated by DeFi, stable coins allow cryptocurrencies to be used as a store of value similar to bank savings. . Stable currency types include Tether (USDT), TerraUSD (UST), and Dai (DAI).
3. Virtiual assets
When it comes to the production and trade of commodities like coins, NFTs, gaming items, and so on, Defi has opened up a completely new commercial frontier within the blockchain. Blockchain technology was essentially transformed into a whole economic ecosystem as a result of the monetization of the digital world. The blockchain is now used to facilitate market establishment, commodity trade, and currency exchange.
4. Cross Chain linking
In essence, a network of blockchains and cryptocurrencies has been built thanks to cross-chain technology. This is one of the most significant effects of DeFi on bitcoin since it has aided the transition of cryptocurrency from an intra-blockchain means of exchange to an inter-blockchain means of trade. As a result, investors have the greatest opportunity to take advantage of opportunities in the bitcoin sector, ending isolation’s restrictions on cryptocurrencies. A framework that is future-proof and makes it easy to develop multi-chain, interoperable technologies is called Substrate.
5. Decentralized Autonomous Organizations (DAOs)
A DAO is an organization created by Dapp users that functions decentralized. Users contribute money to the DAO and receive government tokens in proportion to their contribution, which are then used to vote on the blockchain initiatives the DAO will support. Projects that support the DAO’s objectives can then be funded using the funds raised. Smart contracts enable automatic execution of all of this.
CeDeFi, or centralized, decentralized finance, connects decentralized users to centralized institutions to combine the best aspects of centralized and decentralized banking. CeDeFi was motivated by DeFi’s enormous success. Even corporations are drawn to DeFi due to the ecosystem’s nearly $250 billion in worth. CeDeFi was created by established financial institutions in an effort to enter the growing DeFi ecosystem, despite the fact that DeFi’s decentralized structure contrasts with their system.
Due to these advancements, it is simple to imagine blockchain technology developing into a more vibrant, full-fledged internet for devices running decentralized applications. This is the vision of web 3.0.
This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.
© 2022 Ifediorah Oliver