We will give a brief introduction to Decentralized Finance in this book because of the application we are creating. We've been alluding to the fact that we are creating an exchange on the Ethereum blockchain. Let's explore what exactly that means.
What is Decentralized Finance#
Decentralized finance is also commonly referred to as DeFi. It is another phrase for "open finance". The goal of DeFi is to recreate and reimagine traditional finance systems (lending and borrowing, exchanging between different assets, etc). As more and more financial services and funds make their way into the DeFi space, implied automation through smart contracts will allow finance to evolve into something much more complex whilst being open to more and more people around the world. The only caveat is that the person using DeFi has access to internet.
Some of the common blocks that can be used to create a DeFi ecosystem include: stablecoins (we can use ERC-20 tokens to create a version of this), lending protocols and exchanges.
These are tokens or cryptocurrencibes that are engineered to remain stable at a fixed value. Most stablecoins aim to be $1 USD per token but there are other stablecoins that have different price targets. Different stablecoins have different ways of achieving their price targets (such as automatically creating or removing total supply).