Thanks to this technology, records are not kept in a single center, but in multiple locations and interconnected in a decentralized way. Decentralized is important because in centralized systems, users don’t have direct usage rights, and central institutions retain the power to limit these transactions.
Thanks to DeFi, there has been a significant decentralized development in the field of finance with the implementation of many applications beyond a simple transfer of value and assets. These applications include services such as lending and borrowing, decentralized exchanges, shopping, and insurance.
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Before Bitcoin, for example, when you buy a coffee with a credit card, the bank acts as an intermediary between you and the business. First, it would check whether you had enough funds in your account, then it would register the account to transfer the money to the business’s account, stop the transaction if it deemed it necessary, and earn a commission fee from the transaction. With Blockchain technology, all this happens thanks to an algorithm. There is no need for any intermediary or central institution. Individuals are in complete control. The biggest advantage of DeFi is that it eliminates all intermediaries.
One of the goals of DeFi is to provide this service to people around the world who do not have access to traditional financial systems and to take care of their financial affairs. 1.7 billion people in the world do not have access to financial transactions. DeFi aims to reach these people and bring them into the world of finance.
Ethereum and Decentralized Finance
Most of the applications that have emerged as DeFi are built on Ethereum, the second largest crypto platform. It is much simpler to develop decentralized applications and transactions on Ethereum than on Bitcoin. Detailed information on how all these complex financial transactions work is available in the Ethereum Whitepaper.
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What makes transactions easier are smart contracts, which can be created on Ethereum with the solidity programming language. Smart contracts give the network more flexibility and allow for a wider variety of transactions. Let’s try to explain the working logic of smart contracts with an example:
Suppose an exporter sells raw materials. Let’s program a smart contract for the buyer to pay the money. The rules are as follows: When the raw material is loaded on the ship, 20% of the total price will be sent to the exporter’s address. When the ship is halfway there, when it reaches the current coordinates, 50% of the remaining fee will reach the company. When the ship reaches its destination, the remaining fee will be paid to the exporter. In this process, the movement of the ship and the payment of the fee are mutual conditions. In other words, if the buyer does not pay the fee, the ship will stop and the transaction will not continue. We call the contracts that work with the logic that “if transaction a is realized, transaction b will be realized” without any intermediary, smart contracts.
Applications based on smart contracts and touching all kinds of areas of finance form the basis of the concept of decentralized finance. Due to the ease of creating smart contracts, Ethereum is the blockchain platform with the most DeFi applications.
Most Popular DeFi Apps
Decentralized Exchanges (DEX): This is where you can connect with your wallet and trade cryptocurrencies and tokens directly without a centralized institution in between. Decentralized exchanges are built with smart contracts and have liquidity pools for transactions to take place.
Stabilcoin: A cryptocurrency that is tied to an asset other than a cryptocurrency, with its price pegged to that asset. Tether (USDT) is the most popular. Each USDT is pegged at one dollar.
Lending Platforms (Lending): These are systems that use smart contracts to organize the process of buying and selling loans that you can do in banks. You make a rental payment for the money you borrow to use it. Or you rent your money for someone else to use for a certain amount.
As a result, DeFi allows you to transfer money quickly, cheaply and reliably. Borrow and lend through the established lending system. You can trade through decentralized exchanges.
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