Now that we’ve covered the rise and the infrastructure of DeFi platforms, it’s time to see how they utilize cryptocurrencies to offer their services.
The obvious answer is to use Ether or Bitcoin (most popular cryptocurrencies). But it’s not exactly the right answer.
Due to high volatility or lack of compatibility, DeFi platforms use stablecoins instead of other popular cryptocurrencies.
Now you’re probably wondering what stablecoins are…so let us take this opportunity to explain.
They are cryptocurrencies pegged to the value of another asset. Typically, the asset is a fiat currency such as a USD, or a commodity such as gold. This is done to create price stability for the coin, as one stablecoin is typically equivalent in value to 1 US Dollar.
However, to ensure decentralization, DeFi platforms will typically use stablecoins such as DAI that are backed by crypto collaterals instead of centralized USD reserves.
Ok so now that we covered the decentralized platforms and stable currencies, it’s time to move onto the DeFi services.
One of the most important use cases of DeFi are decentralized exchanges known as DEXs. They operate based on smart contracts that allow users to buy, sell, or trade cryptocurrencies without central authorities.
Another is borrowing and lending which is facilitated through dApps. Users can lend their crypto and earn interest on it, or they can use their crypto as collateral to borrow fiat currencies.
But DeFi offers many other services including decentralized insurance, derivatives markets, and many others.
If it sounds a little risky, but remember that these DeFi services run on smart contracts ensuring that both parties keep their end of the bargain before any transaction is processed.
To wrap up, DeFi is here to change the way that we manage and spend money. It has successfully challenged the traditional financial models and it's only in its early stages.
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