What is DeFi?
Decentralized Finance, or DeFi for short, stands for the connection of classic financial concepts and products, as they are known from banking, with blockchain technology. DeFi is about transferring well-known principles to the world of cryptocurrencies and distributed ledger technology.
To this end, Decentralized Finance relies on instruments such as loans, currency exchange, interest rates, bonds and more. The promising potential of this division has meant that a small boom for DeFi applications has set in since 2019, which intensified in 2020.
Decentralized finance is not, however, the same as decentralized finance. In the broadest sense, the term covers all transactions with a monetary reference in the DLT area and is more synonymous with Open Finance. In a narrower sense, Decentralized Finance and especially DeFi refer to the use cases mentioned above.
Bitcoin, on the other hand, is still the ultimate decentralized finance application in terms of decentralization of the monetary model, while smart contracts usually go for specialized approaches like lending, borrowing and such things.
Applications in the DeFi area
Some dApps based on the principles of decentralized finance have been around for years. Most applications have been on the market since the end of 2018. They can be distinguished by the different benefits. The main uses are:
Lending
Users lend their cryptocurrencies and receive interest for it.
Borrowing
Users borrow cryptocurrencies, deposit security and pay interest on loans. Usually these loans are used to buy more cryptocurrencies (leveraging).
Decentralized exchanges
The exchange of cryptocurrencies for other cryptocurrencies takes place without a central authority and without giving up control of the coins
Derivatives / trading
Some DeFi applications allow complex financial instruments to be displayed and traded with. These include margin trading, options, futures, synthetic assets (betting on the price of stocks) and much more.
Payment
Some DeFi applications specialize in cheap / fast payment processing.
Yield farming
If, for example, users swap Ethereum tokens for one another on Uniswap, this only works if other users have provided this liquidity beforehand. For this service (and the associated risk), you will be rewarded with part of the transaction fees. Yield farming is the art of maximizing this return.
Liquidity mining
With liquidity mining, tokens are distributed for the users of a Defi application, which entitle them to governance or a share of the income at a later point in time. By issuing the tokens, participation in a project is incentivized, so to speak.
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