What is DiFi? Decentralized Finance
What is DeFi?
Technology’s usage in financial services is not new. Nowadays, technology is used to complete the majority of transactions at banks and other financial services firms. However, technology’s function is limited to that of a facilitator in such transactions. Companies must still navigate the legalese of many jurisdictions, competing for financial markets, and differing standards in order to complete a deal. DeFi, decentralized finance with its stack of standard software protocols and public blockchains on which to construct them, puts technology at the forefront of financial transactions.
DeFi is frequently associated with blockchain and cryptocurrency. However, it has a far broader reach. It’s necessary to understand the present status of the financial ecosystem in order to comprehend the thinking processes that led to the creation of decentralized finance.
A “hub and spoke” concept is used to construct modern financial infrastructure. New York and London, for example, serve as operational hubs for the financial services industry, influencing economic activity in spokes—regional centers or financial powerhouses such as Mumbai or Milan, which may not be as globally important as hubs but still serve as nerve centers for their respective economies.
Decentralized finance makes use of technology to disintermediate centralized models and allow everyone, regardless of race, age, or cultural identity, to access financial services from anywhere. DeFi services and applications are primarily based on public blockchains, and they either replicate current offers built on common technological standards or offer unique services tailored to the DeFi ecosystem. DeFi apps, on the other hand, provide consumers more control over their money through personal wallets and trading services that are tailored to individual users rather than institutions.
Components of DeFi?
A software stack contains all of the components of a decentralized financial system. The components of each layer are designed to fulfil a specific role in the construction of a DeFi system. Composability is a distinguishing feature of the stack since the components from each tier may be combined to create a DeFi app.
- Settlement Layer: The settlement layer is also known as Layer 0 since it serves as the foundation for all subsequent DeFi transactions. It is made up of a public blockchain and digital money or cryptocurrency. This money, which may or may not is traded on public marketplaces, is used to settle transactions on DeFi applications. Ethereum and its native token ether (ETH), which is exchanged on crypto exchanges, are an example of the settlement layer. Tokenized forms of assets, such as the US dollar, or tokens that are digital representations of real-world assets, can be used at the settlement layer. A real estate token, for example, may represent the ownership of a piece of land.
- Protocol Layer: Software protocols are defined rules and guidelines that govern certain tasks or operations. This would be a collection of principles and norms that all players in a specific industry have committed to follow as a condition of functioning in the sector, similar to real-world organizations. DeFi protocols are interoperable, which means they may be utilized by various companies to create a service or app at the same time. The protocol layer gives the DeFi ecosystem liquidity. Synthetix, an Ethereum-based derivatives trading system, is an example of a DeFi protocol. It’s utilized to make digital replicas of real-world items.
- Application Layer: The application layer is where consumer-facing apps live, as the name implies. The underlying protocols are abstracted into simple consumer-focused services in these applications. This layer houses the majority of the bitcoin ecosystem’s apps, such as decentralized cryptocurrency exchanges and loan services.
- Aggression Layer: Aggregators integrate multiple apps from the preceding layer to give a service to investors in the aggregate layer. They may, for example, make it possible to shift money seamlessly across different financial products in order to optimize profits. Such trading operations would need a lot of documentation and coordination in a physical setting. A technology-based structure, on the other hand, should smooth the investment rails, letting traders rapidly move between different providers. On the aggregate layer, lending and borrowing are two examples of services. Other examples include banking services and cryptocurrency wallets.