The traditional financial market is highly centralized. The term centralized here means that officials and central banks decide and control a country’s currency. In other words, control of a country’s financial flows is centrally in the hands of that country’s officials. They decide how much money to print, how the money will flow, and so on. In the financial system that governs the world, people also give their assets to institutions such as banks to receive profits. The problem with such a system is that certain individuals centrally control it, and this centralization greatly increases the risk of losing money.
What will happen if people at the core of the financial system print money illegally to deal with a financial crisis? After all, those decision-makers are also human and may make mistakes. A clear example of this is Venezuela. When oil prices plummeted, the country adopted a weak policy on the issue and began printing money indiscriminately to escape the financial crisis. What was the result? Annual inflation of 1 million percent!
Elimination of centralized banks, intermediaries, and organizations from the financial world; Defi works to achieve this goal. Decentralized Finance refers to a set of applications that can handle essential finances, such as loans and financial transactions, in a decentralized manner without the need for intermediaries. In other words, it is not the defense of a project but an ecosystem of hundreds of different projects, all of which provide decentralized financial services.
All over the world, people trust governments at all times, assuming that governments are clean and help protect the value of national currencies. People around the world trust banks on the assumption that they are honest trustees of their money. They trust intermediaries at all times in the hope that they will receive perfect financial services. But history has shown that centralized intermediaries can commit corruption or unintentional error. The field of decentralized Finance has come to eliminate corruption, accidental error, and the need for centralized trust, using the blockchain and the concept of decentralization.
We can also define Defi as a movement to create an open-source financial services ecosystem without the need for a transparent license that is accessible to all and without central intermediaries. In this way, the user has complete control over their assets and communicates with the ecosystem through decentralized applications (Dapps). With its big goal, Defi can be considered alongside the blockchain as one of the most promising innovations of the digital age.
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What are the main benefits of Defi?
The traditional financial world depends on institutions such as the bank (an intermediary) and the court (an arbitrator). Defi programs, however, do not require any intermediaries or arbitration. Instead, it is the programming code that determines how potential disputes are resolved. Most importantly, users have complete control over their assets.
In the utopia of Defi, no one can confiscate your money, oversee your finances, or prevent you from doing business with someone else. Corruption is also kept to a minimum because everything is clear to everyone. In addition to eliminating intermediaries, the use of Defi can reduce costs and enable the creation of an immune financial system. Although it is not easy to remove banks and centralized organizations from the financial world, we seem to be beginning a robust process. The data is stored on a blockchain and distributed to all people connected to the network. With this technology, the possibility of information change, censorship, or system failure is almost eliminated.
Another advantage of such an ecosystem is the easy access of all people to financial services, especially those who cannot use the current financial system. Since the traditional financial system depends on the profitability of intermediaries, these services are not appropriately provided in low-income communities. However, with Defi, everyone can use financial services at a very low cost.
Most parts of the financial world can benefit from Defi, but today most of the activities in this field can be summarized in three general parts:
Getting a loan and lending
Decentralized lending protocols are one of the most popular applications of the Defi ecosystem. Free and decentralized lending has many advantages over the traditional credit system. Interesting features of Blockchain-based lending platforms include:
- Instant payment.
- The possibility of collateral with digital assets.
- The need for no credit checks.
In addition, liquidity providers can make a profit in these systems by placing their assets on the platform, and other people can borrow from that liquidity.
Since these services are offered on the public blockchain, the need for trust will be minimized, and transparency will be very high. In general, decentralized lending systems reduce contractor risk and make it cheaper, faster, and more people use it.
Monetary banking services
Given that Defi programs are, by definition, financial programs, monetary banking is one of the obvious uses of these programs. In addition, these services can include the issuance of Stable Coins, mortgages, and insurance policies.
In the case of credit services, in the traditional system, due to the existence of many intermediaries, the process of registering mortgages and collateral is very costly and time-consuming. However, by taking advantage of smart contracts, legal and underwriting costs are significantly reduced.
On the other hand, issuing insurance on the blockchain eliminates the need for intermediaries and greatly reduces the risk of insurance policy breaches. In this way, while maintaining the quality of services, the price of insurance can be reduced.
According to experts, decentralized exchanges will play an undeniable role in the future of financial transactions. In decentralized exchanges operating on the blockchain, traders can buy and sell digital assets directly. These transactions are done from users’ wallets. Because a centralized organization cannot control exchange processes, transaction fees are very low; However, there are still challenges to the network’s transaction fees.
Where do Defi programs run?
The core of decentralized Finance is the smart contract because decentralized programs work with it. Therefore, blockchains that host smart contracts can also host Defi. While regular contracts use legal materials to determine the people’s relationship, a smart contract uses computer code.
Thanks to the blockchain, a smart contract will have a performance guarantee once implemented. This is because the developer sets the contract terms in the code, and after registering it on the blockchain, he cannot even stop the execution of the contract.
Ethereum is currently the largest platform that Defi projects can work on. It is no exaggeration to say that Ethereum hosts more than 70% of the entire Defi ecosystem.
All in all, decentralized Finance is a broad field that seeks to provide the financial services needed by individuals by eliminating intermediaries. With the help of this area, we can move towards a freer financial system; A system that is accessible to the whole world and prevents corruption, censorship, and discrimination.
Devi’s potential for figuring out different futures is extremely high; A future in which we manage our finances without the need for banks and intermediary companies and have complete control over our assets.