In this article, I will be talking about what Defi is, what Ethereum is, why is it Ethereum, what Ether (Eth) is, what is a smart contract, what Gass means in Defi, what are decentralized applications (Dapps), the pros and cons of Dapps, and finally the future of Ethereum.
What is DeFi?
Decentralized finance is a modern financial technology built on safely distributed ledgers that are comparable to those used by cryptocurrencies. It includes "smart contracts," which, in contrast to the typical financial system where Wall Street investment banks determine whether and how much to run deficits or own, can be programmed to automatically exchange assets and money in a fiercely competitive market. It does not rely on one central authority or individual company to authenticate and execute transactions. In practice, it allows financial services providers to issue assets such as bonds and loans without involving a central intermediary.
What is Ethereum? Ethereum is an open-source worldwide platform for decentralized applications. Considering Ethereum to be a global supercomputer that no one can shut down On Ethereum, software developers can develop smart contracts that manage digital currency according to a set of rules and are accessible from anywhere in the world.
#Why Ethereum? Ethereum is the ideal basis for DeFi since no one owns Ethereum or the smart contracts that run on it, allowing anybody to utilize DeFi. It also means that nobody would enforce new guidelines on you. Tokens and money are integrated into Ethereum, a shared ledger that keeps an account of transactions and ownership. Ethereum provides total financial independence; most products will never take custody of your assets, allowing you to retain complete control.
What is Ether(Eth)?
The Ethereum blockchain's native currency is ether, and it functions like money. Just like Bitcoin, ether can be used for ordinary transactions. You can transmit ether to another individual in order to acquire products and services at market value. The Ethereum blockchain records the transfer and assures the transaction's finality. Ether is also used to pay for the cost of smart contracts and Dapps to function on the Ethereum network. Executing smart contracts on the Ethereum network is like driving a car. You need gasoline to drive an automobile. To execute a smart contract on Ethereum, you must pay a cost known as "gas" with ether. Ether is gradually turning into its own reserve currency and store of value. Ether is now the favored asset choice in the DeFi ecosystem, serving as collateral for numerous DeFi Dapps. It ensures the financial system's safety and openness.
What is Gas in DeFi?
On Ethereum, all transactions and smart contract executions are subject to a modest price. This price is known as "Gas." Gas is the technical term for the amount of processing work needed to complete an operation or a smart contract. The more complicated the execution procedure, the more Gas is required to complete it. Gas is paid completely in ETH. Gas prices change from time to time based on network demand. Due to the limited quantity of processing resources on the network, the Gas price may rise as more individuals engage on the Ethereum blockchain, such as trading in ETH or executing smart contract operations.
Note: Users can determine their own gas prices, but miners will prioritize transactions with the higher gas prices when the network becomes congested due to excessive demand. Transactions that have been validated will be completed and put on the blockchain. If the gas fees paid are too low, the transactions will be queued and will take a long time to complete. As a result, transactions with lower-than-average gas fees may take significantly longer to complete.
Below is an example of how gas fees are determined.
Gas prices are typically represented in gwei. 1 gwei = 0.000000001 ether Assuming a smart contract execution to transfer tokens, we need 35,000 gas units. Assume the average market rate for the gas price is 3 gwei. 35,000 gas x 3 gwei = 105,000 gwei = 0.000105000 ETH
You must pay a gas fee of 0.000105000 ETH when completing the transaction in order for the network to process and validate it.
What are Smart contracts?
A smart contract is a programmable contract that enables multiple participants to establish transaction conditions without relying on a third party for execution. Smart contracts operate on the "if this, then that" logic. When a given condition is met, the smart contract will perform the operation as specified. To perform more extensive procedures and calculations, many smart contracts are connected to function with each other as decentralized applications (Dapps).
Smart contracts eliminate the potential of human mistakes and may automate many operations that would otherwise require human involvement since they are done by code rather than people. One of the finest aspects of blockchain technology is that, because it is a decentralized system that exists between all authorized participants, there is no need to pay intermediaries (middlemen), saving you time and conflict.
Based on the above explanations, you may want to think "Is a smart contract perfect"? Smart contracts are not without flaws. What if there are errors in the code? Or, more specifically, how should governments regulate such contracts? Alternatively, how would governments tax smart contract transactions? Below are a few reasons why smart contracts are considered not perfect:
Smart contracts are not reversible, which means that if an issue arises, it may be difficult or impossible to resolve.
Because smart contracts are implemented on a blockchain network, they may not always be trustworthy. This implies that they are theoretically susceptible to downtime and outages; while Ethereum has been shown to be quite dependable, newer smart contract networks like Solana have seen a few outages as the technology is still in its early stages.
Smart contracts may be expensive to create and need a high level of technical skill.
Because smart contracts are not always configurable, they may not be appropriate for all firms or transactions.
What are DApps?
Decentralized applications (DApps) are digital applications or programs that exist and execute on a blockchain or peer-to-peer (P2P) computer system rather than a single computer. DApps (often spelt "dapps") exist independently of a single authority's jurisdiction and control. DApps, which are frequently constructed on the Ethereum platform, may be created for a range of applications like gaming, banking, and social media.
Pros and Cons of DApps
Below are some of the benefits of DApps:
Immutability: Once information is published on the blockchain, it cannot be changed.
Tamper-proof: Smart contracts published on the blockchain cannot be modified with or without informing all other blockchain participants.
Transparent: The smart contracts that power Dapps are publicly auditable and available for everyone to view only.
Availability: Dapps established on the Ethereum network will stay alive and usable as long as the Ethereum network is functioning.
Cons of DApps. Despite the benefits DApps have in store to offer there are few setbacks available in it, Below are some of the disadvantages of using the DApps.
Immutability: Because smart contracts are developed by people, they can only be as good as the author. Because human faults are inescapable, immutable smart contracts have the ability to compound errors into major issues.
Transparency: Because hackers may inspect the code to uncover flaws, openly auditable smart contracts can likewise become attack vectors.
Scalability: In most circumstances, a Dapps performance is restricted to the blockchain on which it runs.
Difficulties: it has difficulties in creating a user-friendly interface
What else can Ethereum be used for?
Aside from developing Dapps, Ethereum could also be used to create Decentralized Autonomous Organizations (DAO) and issue additional cryptocurrencies. In terms of tokens, Ethereum may be used to develop other cryptocurrencies. On the Ethereum Network, there are presently two major token protocols: ERC-20 and ERC-721. ERC-20 and ERC-721 are protocol standards that outline the rules and criteria for producing Ethereum tokens. ERC-20 tokens are fungible, which means they may be exchanged and have the same value. ERC-721 tokens, on the other hand, are non-fungible, which means they are unique and cannot be exchanged. Consider ERC-20 to be money and ERC-721 to be collectibles such as action figures or collectibles.
What is a DAO?
A DAO is a totally autonomous organization that is administered by code rather than by a single person. This programming is built on smart contracts and allows DAOs to replace traditional organizational structures. Because it is based on code, it is immune to human meddling and operates in a transparent manner. Any outside influence would have no effect. DAO token voting would be used to make governance choices or judgments.
What can DeFi be used for?
Most financial services have a decentralized alternative. However, Ethereum opens the door to the development of whole new financial products. Below is list of some of the things you can use the DeFi for:
Send money around the globe quickly Ethereum, as a blockchain, is intended for transferring transactions in a safe and worldwide manner. As with Bitcoin, enables transferring money throughout the world as simple as sending an email. Simply input the recipient's wallet address, and your money will be sent directly to them in minutes. A wallet is required to transmit or receive payments.
Borrowing There are two types of borrowing money from decentralized sources. Peer-to-peer means that a borrower will borrow directly from a lender. Lenders give cash (liquidity) to a pool from which borrowers can borrow.
Exchange tokens There are hundreds of tokens on the Ethereum blockchain. DEXs let you to swap various tokens whenever you want. This is equal to utilizing a currency exchange when visiting another nation. However, the DeFi version is never closed.
Hopefully, after reading this article, you will understand the basis of DeFi, what smart contracts are, the pros and cons of DeFi, what Ethereum is, how important Ethereum is, and that the goal of DeFi is to get rid of the third parties that are involved in all financial transactions and make you the controller of your funds.****