Decentralized finance (DeFi) is a new movement that is fueling — and being fueled by — the cryptocurrency industry. It provides a means to re-create traditional finance structures in a decentralized architecture without governments or other financial institutions’ involvement. Decentralized finance is now an umbrella term for several financial applications in distributed environments, namely blockchain.
Decentralized finance: An overview
DeFi aims at cutting out all the middlemen or intermediary institutions or corporations that sit between a payer and a receiver in any financial transaction. Currently, most applications categorized under DeFi are built on Ethereum. Ethereum is the world’s second-largest cryptocurrency platform after Bitcoin and allows individuals to build DeFi applications. One of the primary reasons for this is because of Ethereum’s ability to handle smart contracts. Ethereum provides developers with the ability to enable a transaction when certain conditions are met. This makes it a solid foundation to create any finance applications in a decentralized manner. Another reason that Ethereum is the preferred platform for DeFi apps is because the Ethereum network allows conditional checks before executing a transaction.
There are several types of DeFi applications that have burgeoned in recent times. This includes Decentralized Exchanges (DEXs), Stablecoins, decentralized lending platforms, prediction markets, as well as Wrapped Bitcoins (WBTC). Many industry experts believe that we can expect a massive adoption of DeFi applications in the coming years.
DeFi x NFT: Fueling each other
The same excitement and hype about decentralized finance now extends to NFTs (non-fungible tokens). For the uninitiated, an NFT is a tokenized form of a digital asset. NFTs can be used to represent any digital assets, including finance, real estate, governance, retail, artworks, and more. NFTs are also implemented in creating nonmonetary applications of blockchain, such as CryptoKitties. These NFTs can also help individuals register their artworks, such as paintings, music, or videos, to protect against copyright infringement.
For DeFi applications to gain more traction, the community needs to enforce a sense of loyalty to the users, which can be achieved using NFTs. As an increasing amount of capital flows into various industries, NFTs can act as collateral to ensure decentralized finance is safe. Both NFTs and DeFi create a collective environment for providing trust and transparency in the decentralized virtual space. Both NFTs and DeFi fuel up the decentralized financial aspects socially by providing trust, transparency, and collateral to carry out financial transactions on a blockchain network.
NFTs identify the embedded information about digital assets using smart contracts. They are used not only to uniquely identify the ownership of the digital assets but can also be used for trading purposes. Both these qualities help NFTs fuel the rise of DeFi. On the other hand, decentralized financing applications will need the characteristics of both fungible and non-fungible tokens for their global adoption.
Decentralized finance: The next big thing?
Anything that can be tokenized in a decentralized environment can end up as a DeFi application. Considering the growing need for trust and transparency in finances and the rise in blockchain usage, decentralized finance could soon be the next big trend in the IT world. Moreover, DeFi can bring safe and secure financial services to users who do not have access to traditional financial services. This not only makes the service more accessible but also makes it frictionless on a global level.
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