Key Features of DeFi Explained
Published March 16, 2022.
Decentralized finance, DeFi in short, is an umbrella term that captures all of the financial tools built on the blockchain. Namely, it is a fast-growing financial technology that aims to eliminate mediation and enable everyone connected to the internet to lend and borrow money easily. DeFi has the ability to take away control over money and financial services from banks. Without them acting as intermediaries, the financial market can reach a new level of openness and freedom.
DeFi is based on four main pillars known as the DeFi layers:
- Settlement layer This acts as the anchor for the entire system and ensures the necessary security people are looking for in a decentralized system.
- Protocol layer In simple terms, this is a layer that provides the rules of the entire blockchain network.
- Application layer This layer comprises all of the blockchain-generated applications that users might use to trade, exchange, buy, sell, lend and even borrow assets.
- Aggregation layer This is the topmost layer where you can find the services that aggregate the blockchain-generated applications that users can use to trade, exchange, buy, sell, lend, and borrow assets from multiple networks.
The Key Features of DeFi
The fact that DeFi does not require anything else apart from an internet connection to partake is one of the main reasons it is so attractive. Everyone can get a crypto wallet, regardless of their financial status and geographical location. Contrary to traditional finance, DeFi welcomes everyone and offers open access.
This feature promises—or at least increases—the likelihood of DeFi having a bright future ahead of it. It means that new digital assets can be created based on the needs of the users, instead of the needs of a centralized body. While most of the solutions that DeFi offers at the moment are based on Ethereum and the ETH blockchain, it has more than enough support to address any financial service challenge.
One of the main benefits that the DeFi system offers is its transparency. This means that everyone on the blockchain is given insight into the transactions, effectively having the ability to audit while keeping their privacy at the highest level possible. Namely, the identities of users are protected with anonymity, and the visibility over the system makes it trustworthy.
As a term, immutability is a word for not being susceptible to change. All of the data on the blockchain can never be changed, which means that it cannot be tampered with—making it highly auditable and completely secure. This is one of the key features that give DeFi an advantage over the traditional financial systems.
Interoperability means that the applications built into DeFi are designed in a way that allows for easy integration between them. They complement each other and allow developers to create new solutions and add features to existing applications more conveniently. Composability like this also allows UI customization and integration of third-party apps.
Out of all the features we mentioned above, this is probably the most important characteristic of DeFi and the top reason that it has become so popular. It means that the assets and personal data are completely controlled by the user and no one else. This feature alone opens doors to a new age of financial services tailored specifically with the user in mind.
Why the Popularity of DeFi Is Increasing
At the beginning stages of the decentralized blockchain, there were only Bitcoin and Ethereum. Nowadays, there are whole new concepts like liquidity mining and yield farming that attracted the attention of millions of newcomers. Here are some of the most popular applications that contributed to the rise of decentralized finance:
DeFi allows users to purchase cryptocurrency with fiat money and then exchange it as they please without mediation. This means that the users can trade currencies as much as they want without ever paying a fee to an external intermediary like a bank.
With the use of smart contracts, users can lend and borrow finances securely. The execution of this agreement is almost fully automated, so all parties involved can have an immediate and certain outcome without the need for intermediary third parties. Additionally, users lose no time when dealing with smart contracts.
Cryptocurrencies are naturally volatile and widely deemed as unstable. For this reason, stablecoins like USDT, BUSD, and USDC are a nice addition to blockchain technology. They are coins tied to a traditional currency and can be used to maintain the stability of cryptocurrencies.
The place where users can bet on the futures of cryptocurrencies. Recently, it has become a very popular market, especially because there are no intermediaries.