Key Components of DeFi
The crypto and DeFi sectors are growing exponentially, and there are currently more DeFi apps than ever. These projects are already saving businesses and customers both time and money. In fact, DeFi platforms started to emerge across nearly every branch of the financial sector. As the DeFi sector expands, it is important to understand what characteristics all DeFi applications have in common, and what they offer.
DeFi applications have to be open-source, or they are not truly decentralized. Open source coding means that the project’s code is made public. By being open-source, these apps can be audited it and its functionalities, security, and capabilities validated. Open-source codes are more stable and secure than fully-private codes simply because of community interaction. Additionally, being open-source provides more confidence in the platform as users can rest assured that no malicious coding is hidden in the background.
DeFi projects provide the world with new levels of transparency. As most DeFi apps operate on public blockchains such as Ethereum, all transactions are fully available on the public ledger. As a matter of fact, all activity on the blockchain is completely public. The main difference in this approach vs. a traditional bank account is that the accounts are not bound to anyone directly. Instead, user accounts are pseudo-anonymous and list only a numerical address rather than show identity.
While this characteristic is not only bound to Dapps, it is an extremely important one. Anyone can participate in DeFi platforms from anywhere across the globe. All you need is a smartphone with internet access.
Consequently, DeFi Dapps have the ability to solve the problem of certain areas being unbanked or underbanked, as they can bring them the financial services they are looking for. This openness is a major upgrade from the current banking system, which leaves around 40% of the population without any form of banking.
The DeFi sector operates without gatekeepers. As such, anyone can create a DeFi application and offer it to the world. On top of that, anyone can participate in DeFi apps without any concern for approval. This strategy is a massive change from the current financial system that requires every single potential user to be a part of many regulatory verification systems before even participating in the global economy.
Another trait of the DeFi space is interoperability. Interoperability is critical as it ensures that, as more developers enter the space, all the previous work is not suddenly lost. Instead, users can stack their own DeFi products to expand exposure. As an example, it’s common for a single user to utilize stablecoins, decentralized exchanges, as well as wallets. This strategy is only possible due to the seamless integration that DeFi applications possess.
Due to the open nature that DeFi provides, developers are able to exercise way more flexibility in their platforms than they ever could. Users gain considerable options by integrating third-party application integrations as well. If the current options are insufficient, users can even choose to build their own interfaces.
Check out the next video in our DeFi series, where we will show examples on how DeFi is used.