While technology is playing a vital role in several sectors, the financial sector is not left behind. Hence, the term financial technology, a revolutionary approach to bring financial inclusion using technologies. However, recently, Cryptocurrency and Blockchain are among the top disruptors of the financial sector. Therefore, without Blockchain, there would be no DeFi. You must have a good understanding of the buzz word, DeFi.
Concurrently, this article focuses on the definition of DeFi. Meanwhile, you cannot stop there, as it also covers the various DeFi ecosystems, applications, and use cases. It also highlights the top DeFi lending platforms you should know.
The Buzzword, DeFi and What You Should Know
Like the tale of the ten blind men who have a different description for an elephant, the meaning of DeFi is relative. However, every perspective has things in common. Therefore, having understood Fintech, look at DeFi as the new “face of finance” that leverages emerging technologies to solve financial limitations.
DeFi is short for Decentralized Finance. Similarly, Decentralized Finance is the perfection of Open Finance. You may be tempted to call DeFi the digital asset banking that takes away the centralized financial model to the hands of individuals at various nodes (computers or users) across the globe.
That being said, DeFi is a revolutionary financial solution that leverages Blockchain, the Internet, and other emerging technologies to create distributed and open banking movements among individuals.
DeFi Ecosystem and Applications
Bitcoin was the first implementation of Blockchain. However, Ethereum brought about several innovations, including DeFi and Smart Contracts. The first DeFi, Compound, is an Ethereum based DeFi platform, and since then, other Blockchains enable DeFi. Unlike the limited applications of DeFi when it was first introduced on Ethereum, there are various applications including DeFi Lending, Borrowing, Payments, Decentralized Exchange and a Stablecoin.
Meanwhile, the DeFi ecosystem refers to the native or enabling technology, while DeFi applications are the use case as highlighted above. There are other DeFi ecosystems, such as Celo and Algorand that offer solutions to Decentralized Lending (DeFi Lend), Borrowing, and others.
DeFi Lending and DeFi Borrowing Defined
Consequently, you will have an in-depth understanding of the DeFi Lending application and use cases. Nonetheless, let’s define DeFi Lending and DeFi Borrowing, as they both are often thought to be the same.
DeFi Lending is an Open Finance application where investors or individuals can provide loans or lend to others without a third party. On the other hand, DeFi Borrow enables an individual or the public to borrow in a distributed yet trusted decentralized network.
Both parties, lenders, and borrowers sign or agree to the terms of Smart Contracts and the underlying decentralized technological protocols of the DeFi platform. However, one similarity of DeFi Lending and Borrowing is that they pay interest to participants.
How DeFi Lending Works.
DeFi Lending is similar to traditional lending, but is done without the need for a third party. In Decentralized Lending or DeFi Lend for short, investors and borrowers co-interact in a distributed system.
Although the network might differ in protocol and features, the lending platform comprises a lender, borrower, and a decentralized application (DApp).
The lenders and borrowers operate without the need of a trusted party through the DApp. DApp is a distributed computing technology that connects nodes to achieve specific purposes. On the DApp, the lender and borrower define what to lend or borrow as the case may be.
Consequently, if the conditions of the lender were not favoring the borrower, he or she declines. On the other hand, the lender considers the profit, called the interest rate, of setting a certain amount of digital currency. Meanwhile, the DApp hosts the Smart Contract that enables trust-less and automated transactions between the parties.
Nonetheless, at the chosen period, as a lender, you will receive interest that is pre-determined by the Smart Contract through the DApp. On the other hand, your borrower who deposits a Crypto asset for a loan pays or gets charged for interest.
Interestingly, if you have been wondering what asset to lend or borrow on a DeFi, they are fully digital assets. Concurrently, that brings DeFi tokens to mind.
What are DeFi Tokens?
DeFi tokens are tokens or cryptographic protocols that enable you to borrow, lend, stake, etc. on the DeFi platforms. Look at it as the native digital assets of DeFi platforms. Consequently, all DeFi platforms have native tokens. For instance, Lend for Aave, MKR for Maker, KTY for KittieFight, BNT for Bancor, etc.
DeFi Lend Platforms
There are several DeFi platforms, but we will focus on the DeFi Lending platforms.
Aave is an open-source and non-custodial protocol built on Ethereum for Decentralized Lending and Borrowing. It uses a dual token model, Lend for governance, while aToken for lending and borrowing.
KittieFight is using a decentralized gaming application to incentivize gamers. Hence, it is called a Mortal Kombat for Cryptokittie. In a nutshell, it is an open-source gaming and DeFi Lending platform, built on Ethereum Blockchain. It uses ETH for lending and KTY for governance. Gamers and investors are incentivized through yield farming or liquidity mining.
bZx, formally called b0x, is a Decentralized Lending and margin trading platform. It is based on Ethereum Blockchain and has native tokens: DeFi tokens, BZRX token, the iToken, and the pToken for governance, lenders, and borrowers. Since its launch, the platform has successfully attracted several companies, including Fulcrum and Torque, a trading and lending front-end, that utilizes the bZx protocol.
This is a DeFi platform where you can trade, lend, and borrow. DDEX uses Hydro protocol to build decentralized exchanges on Ethereum Blockchain, as well as uses Smart Contracts to self-regulate lending and borrowing.
Maker, also called MakerDAO, is a decentralized credit platform built on Ethereum Blockchain to support Open Finance. It hosts Dai, a Stablecoin pegged in the U.S. The platform offers users several DeFi applications like a Stablecoin, lending, borrowing and saving. Maker hosts a native DeFi token called MKR for governance and a Dai for stability, lending, saving, etc.
Like the parent protocol, Compound, Dharma is an Ethereum based DeFi that offers users the opportunity to lend, borrow, and make payments. It allows U.S. users to earn instant interest with a debit card. Like many other DeFi lending platforms, it has dToken as its DeFi token.
Why BlockFi is Not DeFi
BlockFi started with the aim of helping Cryptocurrency holders exchange fiat. That is to say that it breaks the hurdles of exchanging fiat to Crypto, while earning interest. Consequently, it provides lending, saving, borrowing, and payment services to Cryptocurrency and fiat holders. However, it is a centralized lending platform.
Unlike the DeFi platform, it does not host DApps. Therefore, it operates a “not your keys” trust transaction. Meanwhile, if you are looking to put your Crypto to work in the hands of a treated central system, you may consider BlockFi.
Okereke has a passion for researching blockchain and cryptocurrency. He enjoys creating long form educational content to inform others on the opportunities in this space.