DeFi or decentralized finance is one area of blockchain tech that is attracting a lot of attention. In fact, it is reported to be outdoing BTC in 2020.
If you have been wondering or asking questions about why Defi has been getting the massive amount of attention it has been given this year, this article might help you get a basic if not quite comprehensive grasp of what DeFi tokens are.
DeFi Tokens?
DeFi tokens refer to tokens that are used to facilitate banking/financial services on finance platforms through the use of smart contracts.
Instead of intermediaries, DeFi capitalizes on the decentralized nature of the blockchain to bridge the gap between the consumer/customer who needs the service and the service provider who provides the service.
Defi as a subsector of blockchain tech started gaining porpularity circa 2017, a development which has driven a massive increase in the value of various Defi tokens.
Most Defi projects employ a product development method known as money lego, a method which allows different blockchain applications and entities to function together seamlessly on a single platform.
Want to learn more about how money legos work, read more about it here.
Why the Popularity?
It is logical to be interested in finding out why DeFi tokens are increasing in popularity.
One of the reasons they have been flourishing is that the subsector has gained considerable amount of goodwill and positive reviews from stake-holders for not following most traditional approaches that most of the old financial institutions follow.
For example, unlike traditional unsecured lending, DeFi does not require that the lender knows the identity of the borrower, the smart contract for lending on Defi platforms naturally dictates that a suitable collateral be provided(mostly in form of crypto holdings and stakes) before a loan can be approved.
There is no form of human bias in the decision making process for loan approvals, as long as there is a collateral we are good to go.
The US Securities and Exchange Commission made a statement by shifting towards embracing DeFi through the approval of Arca.
Arca is an Ethereum-based fund. This approval is a welcome development because it shows that times are changing. The greatest challenge to cryptocurrency and blockchain acceptance has always been the cold shoulders they have been getting from traditional institutions.
Conclusion
DeFi tokens are here to stay because of the accessibility they offer by eliminating traditional banking restrictions.
Besides, more traditional institutions are likely to accept this system in the nearest future, this only solidifies the notion that blockchain and the new age of finance is here to stay.