Its real explanation and categories (Edited)
Let's dive in;
- What is Defi?
The word Defi means decentralized finance, it's a term that has been discussed starting in 2019.
Defi means leveraging the use of smart contracts i.e a piece of code in building a permissionless financial product.
In clearer terms, Defi can be better understood as taking components of Traditional Finance (TradFi); such as money market, derivates, and asset management and decentralizing them.
Defi is able to achieve this, by taking away the middlemen and replacing them with a smart contract.
Interestingly a lot of the word decentralization in the Crypto space can sometimes be confusing, because taking a careful look at some of the Defi products you will discover that the word Defi doesn't really go well, because all the products are been built by an organization, so sometimes it better called Non-custodian finance (NcFi)- but this doesn't look sexier, so it safe staying with the word DeFi.
- Misconceptions around Defi and Crypto
Many people sometimes get the word Defi and Crypto mixed up, let's break it down, so we can arrive at a better differentiation between the two
Let's start with - what is Crypto currency?
In a simple sense, a coin has its native blockchain e.g $ETH has the Ethereum blockchain, one key thing to note is that coin has a specific utility over the whole blockchain network it's operating in i.e they are used for payment of transaction fees, staking and governance.
A token is built on pre-existing blockchain- although they might have some similar roles of coins, tokens mainly have utility (use case) in their projects e.g $pancakewap
Let's tie the nut, Defi as we've seen in a simple sense is non-custodian finance which is being run by a smart contract i.e you are in charge of your asset and don't need any KYC,
Infac, all Defi products are built on a blockchain that supports smart contracts e.g Ethereum
So that means, any coin with its native blockchain(using a smart contract) can support the building of any Tradfi product in a decentralized format using a smart contract. Take for e.g Ethereum with its native blockchain and coin $ETH has the largest Defi protocols being built on it, a few of them are DEXs(decentralized exchanges) $Uniswap.
- Defi Products (Categories)
Defi today can be classified base on their different categories and functionalities, a few of the area
DEXs: $Uniswap and $shushiswap used for swapping tokens
Stablecoins: $USDC, $USDT, $DAI used in money market products and others
Derivates: options
Insurance: Nexus mutual & many more..
- Why you should pay attention to Defi
I am a big fan of Defi products, in years to come I believe that Defi will change the paradigm of the entire Crypto space.
Even though they are still some few products that needs improvement
I am still super bullish on a few major defi products.
