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INTRODUCTION TO DEFI AND ITS HISTORY

DeFi is simply a shortened term for Decentralized Finance. The term DeFi refers to a specific genre of financial products that champions decentralization above all else and uses lucrative mechanisms to encourage investors to play along.

The genesis of this technology can be correlated with the creation of Bitcoin in 2009, which brought into existence the concept of a decentralized peer-to-peer digital currency. Over the years, this concept has evolved significantly as the development of the underlying technology on which this concept is conceived has seen a rapid improvement and, the creation of other decentralized platforms that allow for the creation of financial products and services without the need for intermediaries has come into play.

One of the revolutionary examples of DeFi was the creation of the Ethereum blockchain in 2015. Ethereum on arrival introduced contracts that self-executed when encoded conditions within these contracts are met, these self-executing contracts were known as smart contracts.

This paved the way for creating decentralized applications (DApps) that could run on the Ethereum blockchain.

The first prominent DeFi application, MakerDAO, was launched on the Ethereum blockchain in 2017. MakerDAO is a decentralized lending platform that allows users to borrow its stablecoin, DAI, by using their cryptocurrency as collateral.

These newly introduced self-executing contracts (Smart Contracts) made this process seamlessly automatic and eliminated the need for a third party or intermediaries.

Since then, there has been massive growth in the DeFi ecosystem as numerous platforms and products are being developed on various blockchains.

These platforms facilitate the creation of various financial products and services, such as Decentralized Exchanges (DEX), lending and borrowing platforms, prediction markets, insurance, and a lot more.

The key feature of DeFi is its easily accessible and transparent nature. Compared to traditional finance, where access to financial services is geographically restricted, DeFi platforms can literally be accessed and used by practically anyone with an internet connection.

Defi Platforms also offer users greater control over their funds when compared to traditional finance, since these platforms are decentralized, users can make transactions without involving an intermediary.

Another significant advantage of DeFi is the ability to create and innovate financial products and services in a fast and efficient manner. Unlike traditional finance, where regulatory barriers and complex processes can hinder innovation, DeFi platforms can create new products and services quickly and easily, thanks to the use of smart contracts and open-source code.

Undermining these Pros, DeFi is still at its early stage, so it is not without challenges. One of the main challenges is the lack of regulation and oversight, which can make it difficult to ensure the safety and security of users’ funds. In addition, the fast-evolving nature of DeFi can make it difficult for users to keep up with the constantly improving landscape.

Despite these challenges, DeFi is a promising development in the world of finance, offering new possibilities for financial inclusion and innovation. As the ecosystem continues to grow and mature, it will be interesting to see how this technology will shape the future of finance.

HOW DEFI WORKS AND ITS KEY FEATURES

DeFi operates blockchains that permit smart contract creation such as the Ethereum blockchain. As earlier discussed, these smart contracts are self-executing contracts with the condition needed to execute them written into lines of code, eliminating the need for intermediaries.

In the initial stage, DeFi was all about not using centralized exchanges like Binance, as one of the most popular DeFi applications is decentralized exchanges (DEXs). These DEXs allowed users to trade cryptocurrencies automatically without third-party interference.

Borrowing and Lending platforms are another common DeFi application. These platforms allow users to borrow or lend cryptocurrencies without third-party involvement. Users accrue interest on their cryptocurrency by lending them out, while users can also access capital without having to go through the strict financial scrutiny which is carried out by the traditional financial institution.

KEY FEATURES OF DEFI

Decentralization

Defi platforms are built on blockchains, hence making them inherit the decentralized nature of this underlying technology (blockchain). This allows for greater accessibility and inclusivity in the financial system, as it is permissionless and so anyone with as much as an internet connection regardless of their status and geographical location can access and use these platforms.

Open-sourced

The codes of a majority of the DeFi platforms present today have their code logic available to the public. This fosters collaboration and exponential development, as developers can build upon each other’s work and create new products and services more easily.

Transparency

Transactions and activities on DeFi platforms are recorded and stored on a public blockchain. This allows users to see exactly where their funds are going and how they are being used.

Security

DeFi platforms are powered by smart contracts, which are programmed specifically to carry out executions only when conditions written in the contract are met. This makes it almost fraud-proof and free from manipulations transactions are transparent and secure.

Interoperability

DeFi platforms are interoperable, meaning they can communicate and interact with each other seamlessly. This allows for greater collaboration and innovation across the entire DeFi ecosystem.