Decentralized Finance (DeFi)
Is a term that is being used to describe the world of financial services that are increasingly being offered through decentralized platforms. Among these platforms, Ethereum is standing out as a leader for general adoption and overall community engagement.
Stablecoins
There are quite a few Ethereum-based stablecoins available in the market today, and they are largely what is driving much of the DeFi movement. In fact stablecoins make up more of the transaction volume on the network than the native ETH currency does. Essentially, stablecoins work to negate the volatility inherently existent in cryptocurrency at the moment. Most DeFi applications would be infeasible if it weren’t for a reliable medium of value exchange. To achieve this, stablecoins often seek to peg themselves to something with a stable price, usually fiat currencies, and then use smart contracts and controlled minting to ensure the value stays steady.
Exchanges
Decentralized Exchanges (DEXs) make up the majority of the volume in Ethereum’s DeFi ecosystem. DEXs work much like normal exchanges but are designed to remove the need for a company to manage them. They are generally powered by a system of smart contracts and often have a native token of their own.
Borrowing and Lending
The practices of borrowing and lending are nothing new, and literally are the basis of most banking. However in the DeFi world, there is no need for an actual bank to be involved. This can open up financial services to those who won’t or can’t access traditional banks, and is a step toward the cryptocurrency mantra of “banking the unbanked.”
Payments
There are already many payment apps available to consumers, but all generally still put their trust in a centralized company. Again, DeFi comes to the rescue! These services give users control over their payments, privacy, and usually much better fees.
Uniswap works by allowing users to create their own “Exchange contracts,” effectively setting their own exchange rates between Ethereum and different ERC-20’s. Exchange rates that are out of line with the larger market are then subject to arbitrage until they eventually come in line, creating a self regulating system without the need of a regulatory body.
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