While Bitcoin started the cryptocurrency revolution, Ethereum may be the one to take it to a widespread audience.
This is because of decentralized finance or “DeFi,” which refers to the idea of re-making the global financial system in crypto’s image.
From 2019-2020, the DeFi movement has been taking shape and now it’s become the driving force behind much of the cryptocurrency industry’s progress.
Therefore, in understanding DeFi, it’s easy to understand what the future of cryptocurrencies could hold.
Currently, the DeFi space is a collection of peer-to-peer services, i.e., decentralized applications, many of which depend heavily on cryptocurrencies called stablecoins. Generally, a stablecoin is a cryptocurrency that is connected to Dollars, Euros, or another leading currency so that it can maintain a value of $1 a coin.
Because of this, they’re like digital dollars that aren’t controlled by any sort of centralized entity like a bank or a government.
Though they began as a hedge against the crypto market’s rampant volatility, they have now evolved into the primary medium of exchange for Defi apps and services.
According to DeFi Pulse, one particular stablecoin called DAI, makes up 53% of the value of the entire Defi space(assuming that total value= total amount of crypto locked in Defi smart contracts).
With that in mind, think of DAI as the key that opens the gate to the world of DeFi.
If DAI is the key to using DeFi, then smart contracts are the fuel that keep Defi running around the clock and growing by the day.
In case you’re not familiar with smart contracts, picture a contract that’s made out of computer code. That’s the gist of what they are. Smart contracts are special because like Bitcoin, they help to re-define trust and consequently, the way that we all transact with each other across all contexts.
Their code allows for a new kind of application called a DApp to be built on top of them which stores its data on a blockchain instead of in any sort of singular server.
Basically, a DApp is the same as a web application like Facebook except it depends on a blockchain and smart contracts to run instead of a single company that developed it and hosts it.
DApps are important because they allow any web-based app or service to be run by its users, who don’t have to risk any of their data being compromised to use it.
In a DeFi context, a DApp might be a decentralised cryptocurrency exchange or “DEX.” A DEX is different from a CEX(centralized exchange) because it is run by autonomous smart contracts instead of a single company. In theory, Decentralized exchanges give crypto traders a place to trade which they never have to worry about going dark doing periods of extreme price swings. Additionally, they take away the risk that the group controlling them will one day run away with their funds.
Where does this leave us?
Stablecoins, smart contracts, and DApps are the building blocks for the entire DeFi ecosystem, which is swiftly becoming an industry of its own.
Over time, I aim for the Blockdemic Lab to be the hub for all of my thoughts on DeFi and its related technologies.
In my next post, I’ll hone in on smart contracts to shed more light on exactly how they fuel DeFi.
Until, remember that you can always connect with me on Twitter @Expatcrypto3.