Early blockchain enthusiasts were unduly focused on the community's ability to build blockchain networks. The availability of more options for developing decentralised apps, however, has substantially changed the blockchain scene with the arrival of Ethereum. Discussions regarding the future of traditional finance were triggered by the capabilities of Ethereum's smart contracts and tokenization. Blockchain is one of the most important recent disruptive breakthroughs in the banking industry. A totally new wave of financial innovation coincided with the advent of Defi and the top Defi protocols. So what exactly are Defi protocols?

TL;DR

• Defi/Defi protocols were both accompanied by an entirely new wave of financial innovation spurred by Blockchain technology.

• Defi is focused on universal access to financial services.

• Defi protocols are mediums of Protocols are the formats, methods, and procedures governing cryptocurrency lending, and borrowing in Decentralized Finance (Defi).

• Smart contracts on Ethereum and other programmable blockchains are where Defi protocols are implemented.

WHAT IS DEFI?

One of the main opportunities offered by Blockchain technology and cryptocurrencies is universal access to financial services which is the basic role of Decentralized Finance (Defi) in the Blockchain ecosystem. Defi essentially refers to the ecosystem of financial services developed on top of blockchain technology.

By enabling individuals, businesses, and merchants to perform financial transactions through new technologies, decentralized finance eliminates middlemen, centralized authorities, or third parties. Defi makes use of the connection, software, hardware, security protocols, and peer-to-peer financial networks in securing financial services for users.

In the Defi ecosystem investors or people can lend, trade, and borrow using software that logs and validates financial transactions in distributed financial databases from anywhere there is an internet connection in the world using any Defi protocol of their choice. During the process of lending, a distributed database collects and aggregates data from all users and utilizes a consensus process to verify it, making it available from different locations.

As one of the features of the evolving technology; Blockchain Defi being a developing financial technology spurred by Blockchain poses a threat to the current centralized banking system. Defi encourages the usage of Peer-to-Peer or P2P transactions by eliminating the fees that banks and other financial institutions charge for using their services.

WHAT ARE DEFI PROTOCOLS?

It is worth noting that businesses throughout the world have been paying close attention to the exciting possibilities of blockchain. Most notably, the financial industry has been a pioneer in using blockchain technology to its advantage. Cryptocurrency trading, storage, and online payments are just a few of the financial sectors that have been transformed by blockchain.

Furthermore, the current growth of Defi has improved the chances of implementing blockchain in the creation of fintech apps like Defi protocols. Decentralized Finance, or Defi, has recently attracted enormous quantities of capital and has been receiving noteworthy levels of attention through its various lending protocols.

Protocols are the formats, methods, and procedures governing cryptocurrency lending, and borrowing in Decentralized Finance (Defi). Smart contracts on Ethereum and other programmable blockchains are where Defi protocols are implemented.

As an aspect of Decentralized Finance, Defi protocols are specialized autonomous programs created to address issues in the conventional banking industry. For instance, Defi protocols seek to change the fact that more than 50% of the world's population lacks access to a bank account.

According to statistics, the value of all assets locked in Defi assets surpassed the $176.33 billion mark in 2021, making it a very promising year for Defi companies. The best Defi protocols have grown exponentially over the last two years. Over $56 billion in assets are locked up in the business, and several projects have obtained finance in the hundreds of millions of dollars.

With the development of Defi protocols, new financial services and goods can be introduced to meet the many diverse needs of consumers, including several well-known tokens and projects. As the value of Defi protocols increases significantly, startups in this sector also see opportunities for financial aid.

In addition to providing financial solutions, these protocols also construct on-chain assets like stocks and shares and promote liquidity between various blockchains to increase bitcoin and other cryptocurrency adoption.

ADVANTAGES OF DEFI PROTOCOLS

As stated earlier, Defi protocol is defined as a set of guidelines or requirements that control particular operations or activities in the Decentralized Finance ecosystem. Defi protocols for industrial players offer a set of standards and guidelines that are compatible with organizations found in the real world.

Very importantly, Defi protocols are created to enable an integrated and standardized economic system, increase liquidity and development opportunities, and improve financial security and transparency in the Blockchain ecosystem.

Having understood the meaning of Defi protocols, the following are the advantages:

• Self-custody
• Interoperability
• Immutability
• Programmability
• Transparency
• Permissionless
• Programmability

Self-Custody:

This means that when interacting with permissionless financial apps and protocols, Defi market participants always retain ownership of their assets and control over their data by using Web3 wallets like MetaMask.

Interoperable:

Due to Ethereum's modular software architecture, Defi protocols and DApps are designed to be compatible with one another. Product teams and developers can add to already-existing protocols, alter user interfaces, and include applications from outside sources. Defi protocols have been termed "money Legos" as a result.

Immutability:

It is worth noting that the concept of "immutability" is one of the unique features of Blockchain technology. Immutability in Defi protocols, therefore, means that the decentralized architecture enhances security and audibility while ensuring tamper-proof data coordination. "Tamper-proof" or immutability here means that data entered into the Decentralised platforms cannot be edited or removed.

Programmability:

This means that because Defi protocols are so programmable, Smart Contract makes it possible to create brand-new digital assets and financial instruments.

Permissionless:

Defi is classified as open and permissionless in contrast to traditional finance, meaning that anyone with a crypto wallet and an Internet connection, regardless of location, can use DApps created on Ethereum.

Transparency:

Every transaction on the Ethereum network is broadcast to other users for validation since Ethereum addresses are pseudo-anonymous keys that are encrypted. Transparency in transaction data at this level allows for extensive data analysis while also guaranteeing that all users can see network activity. Additionally, the open-source code used to create Ethereum and the Defi protocols running on it is available for anybody to study, check, and improve.

SUMMING IT UP

The ecosystem of open standards for DeFi would keep expanding. DeFi protocols are also used by lending platforms and asset management systems. Traditional financial sector rules are being completely transformed by the numerous use cases for DeFi protocols that have been proposed to the financial sector. Although DeFi protocols will continue to develop, caution must be exercised in assessing their direction. There is no denying that new DeFi projects are constantly being announced in the news. On the other side, it's equally important to identify any potential flaws in the DeFi protocols. Decentralization is one of the risks and weaknesses of DeFi protocols.