Newly baked and barely out of the innovation oven, DeFi already takes up a huge slice of the crypto pie.
Making it important for us to understand how it fits in with the present and future of the blockchain industry.
Both new and seasoned investors set their sights on DeFi’s promise of trustless, permissionless, and decentralised finance. Yet, the growing divide between avid users and sceptics sparks a lot of debate.
Its primary goal is to remove the middleman from financial transactions and this alone is more than enough reason to look into its relevance to blockchain applications.
Let’s take a look into how DeFi can go hand in hand with other popular areas of the crypto space:
DeFi and the Blockchain#
I wouldn’t call the blockchain DeFi’s father — but one could say its decentralised nature as “a chip off the old block”. DeFi is directly related to the blockchain just like everything crypto. Its decentralised, unchangeable public ledger is built on blockchain technology. Because no entity has control over blockchain, DeFi cannot be manipulated to best serve those in powerful positions.
In the future, the growth in the adoption of blockchain is likely to catalyse progress in the development of DeFi.
DeFi and Cryptocurrency#
The entire DeFi system uses cryptocurrencies to provide financial services. Many investors use services such as fund transfers, lending, trading, and derivatives, amongst many others. All of these services need tokens as a means of exchanging value. The rapid expansion of DeFi means it has a direct connection with almost every cryptocurrency out there. Particularly Ethereum, more on that later.
Think of DeFi as a system of channels through which financial value flows on the blockchain.
DeFi and Bitcoin#
Everyone in the crypto space knows what Bitcoin is. To recap the basics, Bitcoin is the forerunner of cryptocurrencies. It is also the one with the largest market cap. Investors use it mostly as a store of value and an asset for long-term investment strategies aka HODLing.
It’s directly related to DeFi by being one of the public blockchains it can be built upon. Many Bitcoin-based financial service applications exist within DeFi. Including decentralised exchanges or DEXs like Bisq, JellySwap, and Liquality. And projects such as Ren and MoonPay. Increases in the total trade volume on DEXs have also been attributed to the growing usage of Bitcoin on DeFi platforms.
Experts also discuss how Bitcoin’s movement in value will influence DeFi usage, given that it adds more collateral.
However, DeFi’s growth is not dependent on the value of Bitcoin. DeFi’s reach is much larger than any single cryptocurrency.
DeFi and Ethereum#
Overtaking Bitcoin in terms of relevance in the DeFi space is altcoin king, Ethereum. Most of what we see and know of decentralised finance are built on the Ethereum network.
As the 2nd largest cryptocurrency, Ethereum gives DeFi a platform to build dApps, where decentralised transactions, lending, and trade take place.
Because of Ethereum, DeFi can use smart contracts to remove the need and costs of having a middleman. The majority of the DeFi ecosystem runs on top of the Ethereum blockchain technology. This cryptocurrency is what solidifies decentralised finance.
Maybe that’s why they call the programming language for Ethereum — Solidity.
DeFi and Other Altcoins#
Besides Ethereum, DeFi works with the majority of altcoins on the blockchain as well. Altcoins are cryptocurrencies that are not Bitcoin including Ethereum. The term is a combination of the words “alternate” and “coin” being an alternative coin for Bitcoin.
They set themselves apart from BTC by upgrading their functions and filling its gaps. Popular altcoins include Ethereum, Ripple, Cardano, Litecoin, Polygon, and Solana.
Many of the altcoins developed and in development intend to be primary drivers of the DeFi system. They aim to amplify ease of use, transaction speed, collateral size, and dApp development.
In the future, we might find more altcoins in development to support the key characteristics of decentralised finance.
DeFi and Stablecoins#
Stablecoin is a form of cryptocurrency that pegs its value to assets such as traditional fiat, commodities, and other cryptocurrencies.
Stablecoin developers like MakerDAO, Binance, and Paxos tokenize these assets to create a collateralized system for stablecoins to be stable.
Since most cryptocurrencies are highly volatile, investors and traders opt to use stablecoins because they don’t usually fluctuate in value.
In the DeFi market, investors use stablecoins to yield rewards on their crypto assets, preferring this over traditional interest-generating investments like savings accounts, bonds, and money market accounts. They become important assets in transfers, lending, and trading.
Parametric cover protocol, Neptune Mutual, uses stablecoins when they make guaranteed payouts to cover policyholders.
DeFi and DApps#
DeFi extends to more than just cryptocurrencies. It’s also an avenue for developers to design and deploy applications on the blockchain called dApps. These are the apps coded with smart contracts that carry out the functions that make DeFi a system without intermediaries.
Earlier, we identified DeFi as a technology that’s built on the blockchain. But, to be more specific, DeFi is built on dApps that are built on the blockchain.
These two major emerging technologies in the crypto industry work together to remove the need for centralised middlemen. They give users the freedom and responsibility of having full control over their digital finances.
It’s likely that dApp development will grow together with the DeFi market, given both functions closely together.
DeFi and Covers#
Even as promising as it is, DeFi is relatively new and in development. DeFi developers and criminals are in a race to discover vulnerabilities in the financial system. While the former intends to improve consumer protection and security, the latter is on the lookout to make their next hack or exploit.
DeFi protocol, Neptune Mutual, gives investors and traders access to parametric cover products. They reduce their exposure to crypto market risks with guaranteed payouts paid instantly once certain hacks and exploits get resolved. Among these are exchange hacks, DeFi protocol attacks, and smart contract breaches.
DeFi and NFTs#
Red-hot and booming, NFTs or non-fungible tokens, are starting to enter mainstream usage. Companies and communities of creators and retail investors investing in the crypto asset. NFTs are digital assets that store valuable things such as art, video game items, photos, videos, music, and other forms of media. It makes these items exclusive and unique.
NFTs and DeFi come together in terms of verifying NFT ownership. With the use of DeFi, it can be easy to prove who owns an NFT. Because of the collateralized design of decentralised finance, investors NFT owners can use them as loan collateral. These NFT-backed loans are growing in popularity and with that, innovation in the DeFi space grows as well.
Creators and owners can use NFTs to attribute value to almost any object. DeFi comes into play by being the system that unlocks the value of such objects.
Soon, we’ll see DeFi and NFTs reimagine how we think of assets and finance.
The Metaverse. Cue Aladdin’s A Whole New World. Kidding aside, the Metaverse intends to be a fully immersive virtual reality space. People can create their own digital environments within the metaverse. They can exist within it as well and connect with other users beyond simply conventional media sharing.
Since the metaverse is made up of different custom-made worlds, it is valuable to have a common way of defining virtual asset ownership so that assets can be transported and exchanged between these different worlds. Projects like MANA, SAND, and GALA are getting more and more popular not least because of the ability to earn, own, and transfer digital assets.
DeFi makes it easy to buy and sell metaverse tokens and helps with P2P transactions. It’s possible DeFi will help establish and nurture the economy or economies that’ll exist within the metaverse.
Why DeFi Matters?#
Looking at DeFi now, it’s not hard to imagine how practical and foundational it is to the crypto market. Including the spaces that exist within it.
Decentralised finance might become the standard for finance in the blockchain. With cryptocurrencies constantly going in and out of DeFi dApps, usage and development in all things crypto will most probably have DeFi as its main drivers.
Similar emerging techs like NFTs and the metaverse will likely increase the dependency on DeFi, given how decentralised finance transfers the power of ownership, autonomy, and access to its users.
An increasing need for DeFi cover protocols will also follow to protect people from the risks associated with crypto.
It’s not hard to see new virtual worlds in which humans will interact, unravel right in front of us. Without a shadow of a doubt, DeFi is a major element in the ecosystem of the blockchain.
