What is decentralized finance? (DeFi)

Published On: July 1st, 2021

Taking care of our finances takes on a preponderant significance. Looking for new ways to invest can be complicated and even more so if we do not have someone close to us who really understands market fluctuations. The global trend to decentralize finances is a challenge. That’s why DeFi is trending in the crypto space. But…what is it and how does it work? What is decentraliced finance (DeFi)? 

 

The term DeFi or Decentralized Finance is the evolution of Fintech: an experimental form of finance that does not rely on central financial intermediaries to offer traditional financial instruments. Instead they use smart contracts (smart contracts) on blockahins, Ethereum being the best known. Their goal is to offer a whole range of services built on a decentralized infrastructure, allowing direct interaction between the user and the platform, without the need for intermediaries. What is decentraliced finance (DeFi)? 

 

DeFi platforms allow individuals to lend or borrow funds from third parties, speculate on the price movement of a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest on savings accounts. According to DeFi Pulse, the platform that is responsible for reporting on the cryptocurrency market, the total value locked (VTB) reached $51.48 B.  These figures reflect a remarkable increase when compared to December last year 2019 when they only reached $697.001 million.

 

DeFi’s operation is possible thanks to smart contracts, one of the main tools derived from blockchain technology. The concept can be translated as an autonomous program capable of executing a series of instructions or clauses: the equivalent of a legal contract but brought to the IT world and enhanced with the ability to be autonomous. 

 

The need for global financial inclusion 

 

This need for decentralized ecosystems arises from the fact that financial services are not available to everyone around the world. Nearly 1.7 billion people around the world do not have the means or access to financial services. Financial institutions cannot provide the necessary infrastructure for people to have access; although the existing infrastructure is enormous, it is impossible to cover the entire sector around the world. This gives us pause for thought: can DeFi solve the problem of financial inclusion worldwide? 

 

An important step towards inclusion 

 

With decentralization, current infrastructure failures are solved, as it ensures that records can be stored and shared between different nodes in the network. It can operate in a peer-to-peer network without any centralized authority. Unlike traditional finance, DeFi can operate without the need for proper infrastructure. Public blockchains can be effectively used to replace the traditional financial system and make it transparent and decentralized, which can provide viable economic activity for everyone around the world. 

 

The true value of decentralization: What is decentraliced finance (DeFi)? 

 

The DeFi ecosystem is made possible by its ability to generate self-sustaining ecosystems without the need for a central regulator, while maintaining security, privacy and trust. Some DeFi applications offer high interest rates – but are subject to high risk. In October 2020 around $11 billion was deposited in various decentralized finance protocols, which experienced a more than 10-fold increase in value over the course of the rest of the year. Likewise, in January 2021, approximately $20.5 billion was invested in DeFi. In 2018 Ethereum had 15 projects and today there are already more than 50. This number is expected to continue to grow throughout the remainder of 2021 and also 2022. 

 

Decentralized finance provides access to new financial instruments, which were previously unavailable. Today, anyone can invest in a simple way and obtain profitability. Against this backdrop, we can understand the fundamental role that DeFi has in the blockchain ecosystem: that of leading to the global massification of the technology, bringing us closer to an economic and financial revolution that bets on a democratization of finance. When DeFi is ready for widespread adoption, it will undoubtedly kick-start the creation of a much more efficient and democratic financial system. 

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