What is DeFi


The name stands for Decentralized Finance(defi). This means that there are no intermediaries of one company that is overseeing and facilitating all the transactions.

The process of borrowing and lending is achieved using blockchain technology on a public decentralized blockchain network so the backbone of Decentralized Finance .

Since it is available on a public decentralized public blockchain network that makes them available to anyone to use. And one can avoid going through banks and brokerages. And you can access the network 24/7.

DeFi lets the users to be lenders and borrowers in a completely decentralized and permission less manner. Decentralized Finance is composed of four layers. And they make up a decentralized finance framework which is hosted on a software stack.

Each layer has its own intended so function which it executes in the structure of a Decentralized Finance frame. “Composability” is animportant feature of the stack on the basis that the components belonging to each layer can be “compose” together to design a application.

The four layers that make up the Decentralized Finance stack are show below:

DeFi Settlement Layer:

Sometimes call as Layer 0, as it is the base layer on which other exchanges are performe. It essentially provides basis and establishes security. It is make up of a public blockchain network and your local currency or crypto.

Similarly The trades that occur on DeFi apps are settle with this money. Or which could eventually be trade in public merchant sectors. A settlement means that it is a payment and it is final and delivered.

Just like when you purchase something using your credit/debit card and then the settlement comes after weeks or months after the initial payment. An illustration of the settlement layer is Ethereum and its Local Token Ether (ETH), which is trade in crypto transactions.

When a transaction is execute in crypto, you want a guarantee that it cannot be reverse or rolle back at a later point in time. The final settlement means cryptocurrency can’t be reverse.

Defi Protocol layer:

Think of it as a set of rules which govern specific tasks and activities. These set of rules apply when a smart contract is execute and it gives Put simply, it provides a consistent foundation and set of “rules” that the blockchain network is based and that both buyer and seller can use it to perform transactions with digital tokens.

It provides liquidity in the sense that it can be use by multiple entitiesat meanwhile to build an application or service. Corresponding to real-world application, that would be a bunch of standards and you decide that everyone in a given industry has agreed to follow them as essential for working in the business. Think of it like a stock market trading listed stocks.

DeFi Application Layer:

As the name suggests, the Application Layer is the face of a service or an app that you provide. Users can interact with this layer trade orders, just like the Robinhood app lets the users to access trading.

Aggregation layer:

This layer is make up of aggregators that interact with different applications from the previous layer to provide support to financial sponsors.

But as an extension of the application layer, it makes the application more user friendly and easy to use for the end-user. The UX/UI design of the Robinhood application provides its users to easily interact with the market and let them trade their stocks.

For example, they can enhance the constant exchange of cash between various stocks. In a real arrangement, such exchange activities would involve significant administrative work and coordination.

Most importantly thanks to DeFi, this technology based finance framework has really smoothen the trading activity. Lending and borrowing is an example of a service that exists on the aggregation layer.


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