Nowadays, DeFi has become a catchy phrase that everyone’s talking about. Among all the reasons why Bitcoin rally, DeFi served as the main push is one of the most convincing speculations.
DeFi, known as the Decentralized Finance, or in other words,the Open Finance, refers to a number of smart contracts, digital assets, and other financial products built on a blockchain network.
In the current financial system, financial services are mainly controlled and maintained by a centralized system. Deposits, withdrawals, loans or derivatives transactions are operated through financial institutions such as banks. In contrast to the concept of decentralized finance, through the distributed open source protocol, DeFi aims to create a financial system that is open to all and no longer requires a central authority.
Why is DeFi developing so fast?
DeFi signifies a brand-new financial system with no centralized third party. In past weeks, we’ve witnessed a boom in Decentralized Finance (DeFi). The latest figures show that the total number of DeFi users has increased by 23% since the beginning of June, while more than $2 billion worth of Ethereum and Bitcoin are now locked into DeFi. Since April, the number of transactions on Ethereum-based DeFi DApps has increased by nearly 800%.
This was driven by the rise of liquidity mining, in which DeFi platforms offered token rewards in exchange for users’ deposits. This led to “unintended consequences” as users raced to buy tokens, creating an artificial demand for certain assets.
For now, most DeFi platforms lock, trade, and lend stablecoins, and the governance tokens traded and locked on the platform are also stablecoins. For example, most users on Compound borrow DAI, and Curve covers almost all stablecoins.
With capitals flooding in, DeFi and its blockchain ecosystem is enjoying a greater prosperity. The distrust towards centralized authorities has grown under the shadow of this unprecedented pandemic. This presents a chance for crypto and blockchain to embrace a bigger market and reach more potential believers than ever before. The boom of DeFi might and might not last. However, what really matters is the surprises that innovation of blockchain technology keeps offering us. To even have a glimpse of the future, is one of the best things blockchain has brought us.