Decentralized finance mostly called Defi is the opposite of Centralized finance or Cefi for short.
The entire global financial system is centralized example people could go to the banks and other places where loan could collected, but the cefi is outdated and easily manipulated leading to fraud and corruption. Sometimes your loan could be denied if you don't have enough money coming into the system and there about or if your not a salary earner.
Decentralized financial foundation is a better option now because it is more trustworthy , fast, efficient and transparent financial system. Unlike Cefi which is managed by the government, bank workers etc, Defi is operating from principles of mathematics and computer science using Blockchain technology which is the cornerstone is decentralize technology.
Defi’s financial stack;
There are five main component of Defi’s financial stack
1 Stable coins; Each cryptocurrency has a different function or utility, for example DAI is a token that is pegged to us dollar and maintains the same value as US dollars making the token price stable. Stable coins were design to bridge the gap between fiat currencies and cryptocurrencies and decrease the volatility associated with holding this cryptocurrencies by allowing people with the token to hold a certain amount of cryptocurrency with less price fluctuation. Unlike Cefi which the money value of money be lost at any point Defi has it’s advantage.
2 EXCHANGES; Exchange are commonly referred to as DEX which is short form of decentralized exchange, the are financial applications that allows users to swap cryptocurrency with other types of cryptocurrency peer to peer without any intermediary. User can trade cryptocurrencies like ether in exchange for DIA with minimum custodial risk due to the nature of blockchain technology while keeping their data private, maintaining complete control over all their funds and exchanging cryptocurrency directly with the user for small swap fees.
3 Money Markets; Money markets simple represent lending and borrowing of money, it provides liquidity which is a key component of any financial market. In decentralized money markets users could borrow and lend their cryptocurrency asset in exchange for interest. Lending your cryptocurrency in exchange for interest can be a great way to earn passive income on the idle asset your holding for an extended period of time if you are comfortable assuming the risk. Projects like compound use a liquidity pool model, if users want to earn cryptocurrency assets, instead of lending it directly to a user the cryptocurrency is placed in a pool with other lenders fund and the user that wants to borrow can secure a loan with an interest rate that is based on supply and demand. There are no credits scores or history associated with users which ensures borrower’s privacy, no collateral in needed as compared to centralized market where the user uses his house or cars has collateral, in a Defi money market a user will deposit a certain amount of cryptocurrency asset in order to borrow another; if the value of the cryptocurrency they used as collateral for the loan ever drops below the amount the borrowed the loan instantly goes into liquidation eliminating the position. The borrower will pay a penalty to the liquidators and any excess collateral would be issued back to the lenders.
4 SYNTHETICS; Synthetics is a term used in finance that represents an asset designed to behave like another assets except with some specific changes made to the asset’s behavior, so since the asset is not actually the asset it is mimicking that is why the word synthetic is used because it’s made to imitate something that is real, in finance synthetic products are derivatives and derivatives are assets whose value is derived from and dependent on the value of another asset, these include option, swaps and futures contracts.
Synthetics financial products exist because the offer investors highly customizable options that provides certain risk exposure and cash flow patterns. In DEFI decentralized synthetics are tokens that follow the price of another token and this decentralized synthetics are used to stimulate activities like funding, liquidity creation and market access while offering complete transparency and superior security of the underline cryptocurrency assets.
This little information could have you if you were wondering what a Defi really is and how it works
