Decentralized finance (DeFi) is a financial technology in the blockchain sector. DeFi is built on decentralized technology such as the Ethereum blockchain, and it provides traditional financial services as well as new financial opportunities.
Decentralized finance undermines traditional centralized financial institutions such as banks and brokerages by enabling customers to conduct peer-to-peer transactions. With DeFi, consumers don’t need to rely on third parties to access capital and financial services.
As of September 14, 2024, the total value locked (TVL) in DeFi stands at $81.88 billion. DeFi is growing as this evolving and modern way of conducting financial activities makes it easy for anyone to participate in a transparent, public financial network that is not heavily controlled or in need of intermediaries.
DeFi has dismantled obstacles and empowered the banked and unbanked populations who can now easily carry out financial activities with DeFi while maintaining total control of their assets. This is made possible because DeFi developers deploy immutable smart contracts on Ethereum to launch financial platforms and protocols that are easily accessible by anyone on the go.
Our focus is to unravel the implications of decentralized finance for new exchanges. In this publication, we will help you understand the DeFi landscape, and how it impacts new exchanges. If you are interested in creating your exchange, here is an easy-to-use guide on how to start a crypto exchange; a perfect way to also benefit from the profitable fintech industry.
Understanding the DeFi Landscape
The DeFi landscape could appear complex for individuals who are not familiar with DeFi. In this section, we will break down the core components of DeFi and its benefits.
DeFi Core Components
To help you understand DeFi let’s break down these three components of DeFi.
1. Smart contracts
Smart contracts are self-executing programs coded in the Solidity programming language. Smart contracts were introduced by Ethereum, they operate strictly to their programming and this ensures that transactions proceed as they should. Anyone can assess a smart contract code and read it to assess its integrity.
Smart contracts function as a neutral third-party intermediary to facilitate and process agreements made between two or more parties.
2. Blockchain
Blockchain technology is the foundation of all facets of cryptocurrencies; DeFi inclusive. They are digital ledgers that record immutable data permanently. Blockchain provides an unmatched level of transparency. With this technology, transactions are recorded in blocks and then verified through an automated program process. After verification the block is closed and encrypted then, another block is created with information about the first block including information about the most recent transactions.
The word “blockchain” comes from the way the information in each block is linked together. The fact that a blockchain can’t be changed is what makes DeFi open and safe.
3. Decentralized applications (DApps)
DeFi apps, or DApps, are programs that can be put on devices and accessed by anyone with an internet link. These software programs run on a peer-to-peer (P2P) network of computers ensuring they are spread across the network to be collectively accessed by its users. DApps are mostly built on the Ethereum platform to allow people to use their money for trading, purchases, gifts, and so on with zero intervention from a third party.
DApps offer a variety of financial options to choose from and users can carry out financial activities from and to anyone in the world.
Benefits of DeFi
DeFi is becoming more popular as the world ages, you might be wondering what is behind DeFi that makes it grow rapidly. In this section, we’ll look at the advantages of DeFi and why it appeals to its customers.
1. Transparency
Every DeFi transaction is recorded on the blockchain and cannot be changed. This ensures that consumers’ financial histories remain transparent, which fosters trust and security. DeFi acknowledges that individual needs are unique so DeFi offers a personalized approach by placing you in charge of your assets and the center of your financial world. Transparency in DeFi fosters a global community built on trust and accountability.
2. Security
DeFi uses exceptional encryption to protect your money, therefore providing users with financial system confidence and peace of mind. DeFi’s concept of user empowerment helps you to take control over your assets, therefore fostering more security. DeFi transactions carried out by automated contracts expedite the procedure and help to lower human mistakes.
3. Financial Inclusion
One of the main factors DeFi appeals for is its financial inclusion concept. DeFi users can meet their needs by using DeFi protocols for a wide range of use cases including gaming, decentralized exchange, lending and borrowing, tokenization, yield farming and staking, margin trading, data and analytics, decentralized autonomous organizations, and asset management with integrity for any financial activity. DeFi has successfully serviced both banked and unbanked populations all around the world.
4. Reduced Intermediaries
This is an important trait and key benefit of DeFi, reduced intermediaries eliminate the need for a central authority permission to carry out financial activities as it is in centralized finance thereby giving its users total control over their assets and data. DeFi puts the customer first, which makes it easy for its users to use banking apps and methods that don’t need permission.
The Impact of DeFi on New Exchanges
The trading market is very different now that Decentralized Finance (DeFi) is in place. The idea by DeFi is being used by new platforms to offer unique benefits such as security, openness, and ease of access. Here we shall look at how DeFi affects newly created exchanges.
1. Increased Competition
DeFi’s unique value propositions make it possible for new exchanges to compete with traditional centralized exchanges. Although centralized exchanges have dominated the world for decades, today decentralized exchanges (DEXs) have risen as a formidable competitor as a result of blockchain technology which has given users control over their assets by eliminating the need for intermediaries.
2. Technological Advancements
Blockchain technology allows new exchanges to provide consumers with transparent and safe transactions as well as smart contracts that automate procedures to lower the possibility of human mistake thereby guaranteeing that transactions are carried out as decided upon. By providing more financial services like borrowing, lending, and yield farming—rigid or impossible with conventional centralized exchanges—new exchanges are also able to attract new users and produce more income. DeFi protocols help to enable these developments.
3. Regulatory Challenges and Opportunities
DeFi’s regulatory landscape presents challenges and opportunities for new exchanges. It is essential to comply with the regulatory requirement to be on the safer side of the law and remain trustworthy by users. The regulatory challenges offer new exchanges the opportunity to explore innovative ways to comply with regulatory requirements thereby fostering innovation.
4. User Experience and Education
Although DeFi is complicated for new users, it is the obligation of new exchanges to give accurate, clear, and simple-to-understand useful resources to attract customers, keep them, and enable them to traverse the platform. New exchanges should offer easy-to-use interfaces and instructional resources to let users of new exchanges make wise judgments. To its users, new exchanges might provide free or paid training, guidelines, and support tools.
Final Thoughts
DeFi’s impact on new exchanges is significant. New exchanges are advised to explore the DeFi space, leverage DeFi protocols, smart contracts, and blockchain technology to thrive easily, compete with centralized exchanges, and generate more revenue.
