Understanding DeFi: An Overview

- 25 January 2022 12:50 WIB
Ethereum is an example of scalable DeFi.  ( (Unsplash/Ethmessages))
Ethereum is an example of scalable DeFi. ( (Unsplash/Ethmessages))

JAKARTADAILY.ID – Following bitcoin's launch in 2009, the blockchain and crypto space exploded. Due to its decentralized nature, various developers started creating solutions for different use cases.

Decentralization means that no one can control or exert control over a financial institution. The ledger, based on blockchain, is distributed to various "locations" instead of being kept in one place. As long as the blockchain mechanism runs, there is no chance of losing all data at once.

DeFi, or Decentralized Finance, is a sector of the crypto space that was created to provide alternative financial services. Its decentralized nature and various applications are powered by smart contracts, programs on a blockchain that run when predetermined conditions are met.

DeFi is a subtype from the crypto space that provides various services to the masses. Unlike traditional financial services, it operates in a controlled fashion by the masses, not the institution. Its products include peer-to-peer lending, saving, investing, trading, and market-making.

Users will need a decentralized exchange (DEX) to trade. DEXs are digital assets that can be traded in a non-custodial manner. They allow users to do business without establishing an account with a third-party service provider. Moreover, DEXs allow users to hold their assets while still allowing them to transact with others using blockchains.

Asset liquidity must be available to keep the exchange running. With Automated market makers (AMM), DEXs can provide a liquidity pool instead of relying on a bid-ask mechanism.

DEXs are typically built on top of a specific blockchain, making them incompatible with various other blockchains. For example, Uniswap is built on top of Ethereum's blockchain. It allows the trading of any tokens built on top of Ethereum.

Read More: How To Safely Store Crypto

Editor: Suksmajati Kumara

Source: Investopedia


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