On the Ethereum blockchain, gas fees are payments made by users to compensate for all the heavy-duty computing energy required to process and validate transactions. One nagging issue surrounding DeFi is the high gas fees users have to pay for even simple transactions. This is made possible because of Ethereum’s preference for smart contracts, which executes transactions automatically if certain pre-determined conditions are met. These DeFi applications that are used to make complex financial transactions are inevitably built on the Ethereum framework, the world’s second-largest cryptocurrency and blockchain system. DeFi, however, expands the scope of these transactions from simple transfers to more complex financial use cases. Released in July 2015, Ether is second only to Bitcoin in terms of market capitalisation today.ĭeFi, on the other hand, is the term used to describe financial applications built on blockchain technology, which in turn aims to democratize the economic landscape by replacing centralized institutions such as brokerages, banks or exchanges.ĭeFi draws its inspiration from blockchain, the technology that powers Bitcoin, Ethereum and other cryptocurrencies, in which a collective group of entities holds the records of transactions in lieu of a single entity. Ethereum is a decentralized open-source blockchain that also contains its own cryptocurrency Ether that can be used to transact on the platform.
Don’t be flustered yet, we’re here to explain everything you need to know about DeFi and how you can invest using this technology.īefore we talk about DeFi, let’s first talk about Ethereum, the platform on which most of the DeFi projects are built. That’s because not only is DeFi a new addition to the cryptocurrency lexicon but it’s use-case is destined to reach far beyond the current lending and trading sectors it currently works in. If you’ve dipped your toes in the world of cryptocurrency, then one of the most important terms you need to understand is DeFi, or decentralized finance.
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