What is Defi and Why is it common on blockchain networks?

What is Defi and Why is it common on blockchain networks?

The word Defi means Decentralized Finance, the blockchain is naturally built to be decentralized, and in other to have a sustainable financial system on the blockchain, Defi was Introduced, the name Defi was founded on a telegram group’ by a team of Ethereum developers in August 2018, by Brendan Forster, Inje Yeo, and Blake Henderson, after days of name-hunting what to call their new brand financial application. 

Defi applications are created to counter the regulatory banking system, Defi can be called the Non-custodial digital banking system, individuals are in control of their assets by storing them on a crypto wallet. More like traditional banking, Defi assets can be “locked, borrowed, or lent out for additional interest depending on the period implied.

The DeFi Terms

DeFi terms are ways in which a project chooses to offer a yield to its users which come with a percentage calculation known as the Annual Percentage Yield (APY) or Annual Percentage Rate (APR), the DeFi terms are categorized into four different crypto terminologies like Staking, Yields Farming, liquidity mining, or liquidity pool.

What is staking?

Staking in the cryptographic space simply means an asset being locked up for a given period, this option comes with an Annual Percentage Yield(APY) which might vary depending on the crypto protocol. 

What is Yield Farming?

Yield Farming is an option similar to staking but mostly comes with a higher Annual Percentage Yield(APY) and a combination of different tokens including stablecoins. 

What is Liquidity mining?

Liquidity in finance simply means assets, therefore a liquidity mining pool on the blockchain is an asset deposited on a smart contract for interest yield, the pool requires an asset to be merged with the smart contract which is referred to as trading pair, these pairs are a pool of optional tokens, and each trading pair has its smart contract. 

There are DeFi platforms that lend assets to private investors or organizations after assets have been deposited into a smart contract by users; this is mostly done with a stablecoin which may perform as a  collateralized asset, thereafter taking a percentage of the generated variable yield attained, and distributes profits to users. Asset withdrawal is instantly paid out in some projects while some have a fixed period for withdrawal.

Defi as a digital economic platform has other diverse strategies built on the different blockchain networks like Ethereum, Solana, or Algorand, where most decisions are managed by the community for the sustainability of a particular protocol, and the rules of engagement are not Centred toward an individual preference.