What are Decentralized Finance (DeFi) Applications?

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What are Decentralized Finance (DeFi) Applications?

Decentralized Finance Applications, or DeFi applications, are pieces of open-source technologies that aim to improve on different aspects of the current financial system through the introduction of a decentralized layer in order to disintermediate rent-seeking middlemen.

Using cross-boarder payments as an example, when an individual makes a payment to another individual located in another country, a financial institution would help facilitate this payment and in return take fee for doing so.

However, DeFi applications such as Bitcoin, can disintermediate the entire process by having an individual send bitcoins from his or her wallet to the intended recipient without the aid of financial institution sitting in the middle.

What are Decentralized Applications?

DeFi applications are a subset of a new application type known as decentralized applications. A decentralized application, or DApp, is an application that runs on a peer-to-peer network of computers, as opposed to a single computer. The key benefit of this is, users of the network do not depend on a central computer in-order to send and receive information.

In order to fully understand the difference between a decentralized application and a centralized application, let us consider some examples of centralized applications such as: Facebook, Twitter and YouTube. These are all examples of centralized applications, because in-order to use them, the user is dependent on a network owned and operated by a central entity. This is in contrast with a decentralized application, where the user is not dependent on a central entity to send and receive information, a key example being Bitcoin.

Decentralized applications have many use cases, from prediction markets (Augur), to games (CryptoKitties) and finally payments (Bitcoin). However, the commonality between all decentralized applications is the disintermediation of middlemen through the introduction of decentralized network architecture such as a blockchain or a tangle.

Different forms of DeFi Applications

Just like how there exists different many use cases of decentralized applications, there too exists many different use cases for DeFi applications and the problems that they are trying to solve. Examples include:

  • Payments
  • Lending
  • Stablecoins

Payments – DeFi Applications currently trying to disintermediate the payments space include the likes of the previously mentioned, Bitcoin protocol. These types of DeFi applications tend to have their own digital native currency with which users can use to transact with, as well as offer a wallet address in order for users to hold their digital currency.

Lending – DeFi lending applications are another attempt at decentralizing a core function of a financial economy. Instead of an individual going to bank to secure a loan for a house, for example, DeFi lending applications aim to democratize the entire process by allowing the individual access to a much wider pool of willing lenders. One example of a DeFi application currently working in the lending space is the Dharma protocol. Built on top of the Ethereum blockchain, Dharma allows participants to lend and borrow different forms of collateralized debt.

Stablecoins – A stablecoin is an asset that offers price stability characteristics making it suitable for certain functions such as a: medium of exchange, unit of account, and a store of value. Stablecoins have seen increasing interest in the digital asset space due to their function of providing price stability to otherwise volatile assets such as Bitcoin, Ethereum and other digit assets. Tether was the first ever released stablecoin that provided a 1-to-1 backing of each Tether issued to 1 USD. However, since the controversy that the stablecoin has run into surrounding its solvency, other stablecoins such as: MakerDAO, Gemini Dollar (GUSD) and Circle (USDC) have since been launched.

An Image of DeFI protocols.
An infographic of DeFi applications and services.

Conclusion

To conclude, DeFi applications are open-source technologies that aim to disintermediate and democratize the current financial system. Different facets of the financial system that stand to be disrupted through the introduction of a decentralized network architecture include payments, lending, stablecoins and many others such as derivatives and indexing.

There exists many different projects and companies being built in the DeFi space, of which a curated list of them all can found here: GitHub – Decentralized Finance Applications .

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