FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Decentralized Finance

Updated on March 11, 2024
Article byPrakhar Gajendrakar
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Decentralized Finance (DeFi) Meaning

Decentralized finance (DeFi) is one of the emerging technological evolutions based on blockchain and cryptocurrency. It is an alternative to the traditional financial system, and it decentralizes both finance and its regulations, nullifying the significance of intermediaries like banks and exchanges in financial transactions.

DeFi relies on blockchain technology to decentralize the financial system, allowing for decentralized financial services and new business models. DeFi creates a financial system that is creative, open, global, and transparent. Decentralized finance, while intriguing, has a variety of obstacles and limitations before reaching its best extent.

Key Takeaways

  • Decentralized finance is a system powered by blockchain and cryptocurrency technology, forming an alternative to the traditional financial system.
  • It offers financial products to users without intermediaries like banks and exchanges.
  • Examples are Aave (AAVE) and Synthetix (SNX). Examples of DeFi companies are AllianceBlock and HYPR Corp. Block Inc (NYSE: SQ), Riot Blockchain Inc (Nasdaq: RIOT), and Robinhood Markets Inc (Nasdaq: HOOD) are examples of DeFi stocks.
  • Examples of its applications are DeFi crowdfunding platforms and decentralized hedge funds.

Decentralized Finance Explained

Decentralized Finance (DeFi) is a peer-to-peer financial system. It portrays an ecosystem filled with financial applications and services powered by blockchain technology. It presents alternatives to traditional financial services accessible using the internet and not backed by intermediaries; in the absence of centralized entities, the decentralized trustless framework results in more innovations. As of September 2021, the total value locked in DeFi systems is around 100bn USD.

Decentralized Finance

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Decentralized Finance (wallstreetmojo.com)

An important term associated with DeFi is the smart contract. Smart contracts are computer programs stored on blockchains that automatically get executed when the predetermined conditions are met; for instance, they can connect a borrower and lender if their conditions match. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, compatible, and transparent way. Furthermore, some examples of DeFi building blocks are decentralized exchanges, decentralized debt markets, blockchain derivatives, etc.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

The idea of new technology trying to overthrow or shakedown established institutions and traditional ways of transactions was not well received by many. DeFi exhibits properties like robustness, efficiency, and transparency and may manifest many benefits like optimized transaction cost and reduced entry barriers. However, opponents advocate that it’s still like a niche market with significant risk elements. The possibility of fluctuating transaction rates on the ethereum blockchain making trading expensive in the future is an example of its disadvantages. Moreover, according to the report by Elliptic DeFi, users lost billions of dollars to theft in 2021.

According to General Manager Agustin Carstens of the Bank of International Settlements, people who believe in a decentralized future of money are chasing an illusion. He said that “there is a lot of centralization in decentralized finance in practice.” Even the smart contract protocol depends on programmers, and certain features of DeFi blockchains favor the concentration of decision-making power in the hands of large coin-holders. 

Examples

Examples of decentralized finance companies are AllianceBlock, Jeeves, Coinbase, HYPR Corp, Sommelier, Stobox Technologies Inc., Teller, Cion Digital, and Symbiont. In addition, block Inc (NYSE: SQ), Riot Blockchain Inc (Nasdaq: RIOT), Robinhood Markets Inc (Nasdaq: HOOD), and Coinbase Global Inc (Nasdaq: COIN) are examples of decentralized finance stocks. Briefly, let’s look into some of the DeFi examples.

Aave (AAVE), built on Ethereum protocol and formerly known as ETHLend, is one of the first and biggest DeFi platforms. Aave is where users get incentives for making deposits and a platform to borrow assets, hence connecting lenders and borrowers in a decentralized environment, making it a decentralized liquidity platform. Lenders get interest income without engaging third parties. There is no checking of creditworthiness; hence it is a “trustless” network. Users can earn points and discounts by staking the AAVE currency on the Aave DeFi platform. An automated and rapidly executed loan known as a flash loan is a specific feature of the Aave platform.

Synthetix (SNX) is an Ethereum-based protocol for creating synthetic assets. The fast-expanding decentralized exchange allows users to create their synthetic assets, known as “synths,” which may be used to trade fiat, derivatives, cryptocurrencies, and other asset classes. Synthetix also supports commodities like gold and silver. Hence, It connects non-blockchain-based assets to the crypto ecosystem.

Uniswap (UNI) is a decentralized cryptocurrency exchange that enables users to buy and sell cryptocurrencies. The Uniswap system using the Ethereum platform and smart contracts was selected as the largest decentralized exchange in October 2020. In addition, Uniswap’s native token, UNI, may be available on investing platforms outside of the DeFi network, such as Voyager, because of its popularity.

Cardano, launched in 2017, is a blockchain platform using Proof of Stake (PoS) protocols. Its internal cryptocurrency is known as ADA. Cardano DeFi projects using blockchain technology focus on improving finance and banking by portraying decentralized bank accounts, money transfers, and financial apps for consumers and companies.

Applications

Let’s look into some of the common applications:

  • The application of smart contracts reduces the role of intermediaries providing “trust” services.
  • DeFi application helps users get exclusive control over their assets and data.
  • Creates fast, safe, and transparent payment systems.
  • It eases trading in cryptocurrencies 24/7. DeFi coins like AAVE, Cosmos, Decentraland, and Polkadot are available on a 24/7 basis.
  • DeFi crowdfunding platform is an example of its application.
  • DeFi app offers insurance for cryptos.
  • Yield farming in DeFi is a popular and riskier investment strategy. Investors engage in staking or lending crypto assets to generate returns.
  • Contributes to decentralized hedge funds in the form of decentralized cryptocurrency hedge funds.

Frequently Asked Questions (FAQs)

What is decentralized finance?

Decentralized finance is revolutionary technological evolution powered by blockchain technology. It presents an alternative to the traditional financial system by reducing the presence and significance of intermediaries like banks in facilitating financial services.

What is an example of decentralized finance?

Examples are Aave (AAVE), Synthetix (SNX), Uniswap (UNI), and the Cardano DeFi project. Examples of decentralized finance companies are AllianceBlock, Jeeves, Coinbase, HYPR Corp, Sommelier, Stobox Technologies Inc., Teller, Cion Digital, and Symbiont. Block Inc (NYSE: SQ), Riot Blockchain Inc (Nasdaq: RIOT), Robinhood Markets Inc (Nasdaq: HOOD), and Coinbase Global Inc (Nasdaq: COIN) are examples of decentralized finance stocks.

Is decentralized finance good?

It is good since it creates a financial system that is creative, open, global, fast, and transparent. In addition, it’s more user-facing, user-oriented, or user friendly because of features like democratizing nature, optimized transaction cost, and low barriers to participation.

This article has been a Guide to Decentralized Finance (DeFi) and its explanation. We explain its examples, applications, DeFi companies, stocks & hedge funds. You can learn more about accounting from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *