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The explosive world of crypto continues expanding far beyond just digital money into decentralized apps. Exciting software-based financial applications now empower users in radically innovative ways – without companies or middlemen in control. Welcome to the rising new paradigm of decentralized finance, or DeFi.
Cutting Out the Financial Gatekeepers
DeFi aims to recreate traditional financial systems with all the same core services, but crucially without big banks or institutions in the middle extracting value. Instead, everything operates through automated smart contracts running transparently on public blockchain networks like Ethereum, Binance Smart Chain, Solana, and Polygon. This allows for accessibility, democratization, and the virtual elimination of fees for financial services normally monopolized and restricted by gatekeeping intermediaries.
Decentralized Trading Exchanges
Decentralized exchanges (DEXs) allow direct trading of crypto assets peer-to-peer through liquidity pools rather than orders books. Popular DEXs include Uniswap, PancakeSwap, Curve, and dYdX. Unlike Coinbase or Binance, no company or centralized entity owns a DEX.
Trades occur independently through smart contracts trustlessly executing swap instructions automatically when users request them. User funds stay secured in non-custodial wallets only they control, eliminating hacking and misappropriation risks from third party custody. Trades cannot suffer outages or interference since DEX exchanges run autonomously via code on blockchain. The decentralized, automated nature also lowers fees drastically – money typically skimmed by profit-seeking corporate middlemen.
Borrowing and Lending Without Banks
Protocols like Aave, Compound Finance, and MakerDAO facilitate decentralized lending pools where users can earn attractive interest rates sharing their crypto capital in “bankless banks.” Borrowers put up collateral to take out loans, with everything enforced by unbreachable smart contracts alone. No credit checks or paperwork required.
These autonomous systems allow instant transfers of assets like stablecoins round the clock, 365 days a year. Interest rates respond organically to market demand based on programming, removing human arbiters. Despite volatility, smart contracts secure loans through overcollateralization. Altogether, DeFi introduces unprecedented accessibility alongside reasonable rates and continuous operation.
Stabilizing Value with Stablecoins
Asset-pegged stablecoins like DAI and algorithmic stablecoins aim to overcome notorious crypto volatility. These achieve $1 token values fixed to real world currencies, either through collateralization or supply-adjustment coding. This allows entering DeFi apps without exposing savings to crypto’s unpredictable ups-and-downs.
Other stablecoins like Tether directly back tokens 1:1 with bank deposits. And regulated fiat-pegged coins like USD Coin partner with financial institutions to insure redemptions. By stabilizing purchasing power, stablecoins unlock more utility for blockchain payments and DeFi participation.
Altogether, the DeFi movement demonstrates finance democratized for the internet age and beyond – moving essential plumbing onto public programmable consensus blockchains. The decentralized future of borrowing, lending, trading and payments is already here!
