Decentralized Finance: a few good to know terms.

Decentralized:
The word decentralization means that there isn’t a single point of failure, as identical records are kept across thousands of computers through a peer-to-peer network. It is also permissionless, it is also open to anyone — irrespective of their wealth or where they live. This is in contrast to a bank or a payment processing company which refuse service to anyone for any reason, refuse to do business with anyone for any reason and can close the account of any customer. In contrast blockchains based applications are just code, which executes transactions regardless of who requests service or transactions.

**Decentralized Applications: **
At the heart of decentralized finance are decentralized applications, also called Dapps. These plug-and-play tools make it easy for anyone with a smartphone to access financial services at lower costs. In theory and practice, the operations of these businesses are not managed by an institution and its employees — instead the rules are written in code (or smart contract, as mentioned above). Once the smart contract is deployed to the blockchain, decentralized applications or Dapps, can run themselves with little to no human intervention. However although normally developers monitor and maintain the Dapps with upgrades or bug fixes.

Open Source Code for Dapps
The code for many or most of these applications are open source, meaning it is posted on a public github or code library and anyone with the necessary computer coding skills can view transactions and audit the code audit. This builds a different kind of trust with users, because anyone has the opportunity to understand the contract’s functionality or find bugs. All transaction activity is also public for anyone to view. While this may raise privacy questions, transactions are pseudonymous by default, i.e. not tied directly to your real-life identity.

Global Reach
Decentralized Applications are designed to be global, as in regardless of where you live Americas, Asia, Europe or South Pacific. You have access to the same DeFi services and networks. Except where local laws and regulations prohibit, but the technology makes most decentralized financial applications available to anyone with an internet connection.

Types of Transactions
These “Credit Facilities” which allow the use of cryptocurrency as collateral for loans, the “collateralized debts” or “collateralized debt products” which are basically collateral backed loans of various sorts. Additional possibilities for cryptocurrency based finance includes using non-fungible tokens to represent fractions of physical assets so the owner can sell fractions of a hard asset. Also nonfungible tokens can represent traditional securities and allow them to be used as collateral for cryptocurrency loans. This is a duplication of of a traditional banking function.

Examples of existing Decentralized Finance Dapps

Stablecoin and Decentralized Reserve Bank: MakerDAO

Maker is a stablecoin project where each stablecoin (called DAI) is pegged to the US Dollar and is backed by collateral in the form of crypto. Stablecoins offer the programmability of crypto without the downside of volatility that you see with “traditional” cryptocurrencies like Bitcoin or Ethereum. You can try creating your own DAI stablecoin on the Maker Oasis dapp. Maker is more than just a stablecoin project, though–it aspires to be a decentralized reserve bank. People who hold a separate but related token, MKR, can vote on important decisions like the Stability Fee (similar to how the Federal Reserve’s Federal Open Market Committee votes on the Fed Funds rate).
Another stablecoin with a different architecture is USD Coin (USDC), where every USDC token is backed by one US dollar held in an audited bank account.
Borrow and Lend: Compound
Compound is a blockchain-based borrowing and lending dapp — you can lend your crypto out and earn interest on it. Or maybe you need some money to pay the rent or buy groceries, but your funds are tied up in your crypto investments? You can deposit your crypto to the Compound smart contract as collateral, and borrow against it. The Compound contract automatically matches borrowers and lenders, and adjusts interest rates dynamically based on supply and demand.
Other popular borrow/lend dapps are Dharma and dYdX. Aggregators like LoanScan track borrow/lend interest rates across the various dapps, so you can shop around for the best rates.
Automated Token Exchange: Uniswap
Uniswap is a cryptocurrency exchange run entirely on smart contracts, letting you trade popular tokens directly from your wallet. This is different from an exchange like Coinbase, which stores your crypto for you and holds your private keys for safekeeping. Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle trades near the market price. In addition to trading, any user can become a liquidity provider, by supplying crypto to the Uniswap contract and earning a share of the exchange fees. This is called “pooling”.
Other popular Decentralized Exchange platforms (Dexes) include 0x, AirSwap, Bancor, Kyber, IDEX, Paradex and Radar Relay. All have slightly different architectures.

Written by Shortsegments.