With the introduction of Blockchain technology into our lives, we have often heard of new concepts such as Coin, Metaverse, NFT, which also include finance or investment opportunities. DeFi is one of these concepts; in fact, it is the most comprehensive and necessary one.
DeFi is a generic name for “decentralized finance“, which is a combination of the English words “decentralized” and “finance”. DeFi covers financial products and services that are accessible to anyone with an internet connection. For this reason, tens of billions of dollars worth of cryptocurrencies have flowed through DeFi applications so far, and this amount is increasing every day. Bitcoin is the most important emerging asset in this space.
Why the need for this decentralized structure where thousands of people can be both users and managers? DeFi was created for the internet age as an alternative to the banking system, which is opaque, tightly controlled and held together by decades of infrastructure and processes.
DeFi exists to build a more democratic financial system in the wake of the emergence of cryptocurrencies for freedom. Approximately 1.7 billion people in the world do not have access to the traditional financial system, i.e. banking. DeFi’s first goal was to reach these people that the current financial system cannot reach.
On the other hand, after the 2008 crisis, many people’s trust in the banking system was shaken. The dominance of one center over all financial instruments, monetary policies, and a system where even banks could make losses at any time were interpreted as both unsettling and discredited. It is precisely for these reasons that governments’ unlimited ability to print money and change valuations has increased people’s interest in systems where no one can intervene based on a certain formula.
With blockchain, where there is no need for centralized authority, the field of finance has become freer. At this point, we can say that DeFi was born out of necessity, like all alternative methods in life.
Thanks to DeFi, banking transactions are carried out not by an authority but through an algorithm created by the system. With millions of devices connected to DeFi networks, it enables transactions to be made through a certain formula. Therefore, there is no central intervention in DeFi systems. It is the users who make the system work.
Of course, financial instruments are not limited to sending and receiving money. With DeFi, different financial functions should also be considered. These include taking loans, giving loans, decentralized stock exchange, insurance, shopping, marketplace, and so on.
All DeFi systems need to have a cause-and-effect relationship. Therefore, smart contracts, decentralized applications, and consensus protocols play an important role in DeFi systems. At this point, it may be easier to understand DeFi in layers.
Blockchain: Contains the transaction history of digital currencies or assets and the status of accounts.
- Assets: ETH and other tokens (currencies).
- Protocols: Includes smart contracts that provide functionality such as a service for decentralized lending of assets.
- Applications: Products used to manage and access protocols.
Advantages and disadvantages of DeFi systems
DeFi claims to offer a better system than traditional financial systems. Therefore, there are areas of use that have advantages over traditional financial systems.
DeFi’s advantages are as follows in general terms:
- It makes money-based banking systems available to everyone.
- It enables borrowing and lending transactions between users.
- It enables the introduction of a new cryptocurrency to the market and the ability to raise funds for projects.
- The disadvantages of DeFi can be listed as follows:
- DeFi is a new system, so there are still gaps in some areas.
- Although it aims to be available worldwide, there are very few people using DeFi now.
- So many transactions need to be stored as data somehow. There is not enough infrastructure to store this data.
There is a thriving crypto economy where you can lend, borrow, go long/short, earn interest and more. Crypto-savvy Argentinians used DeFi to escape inflation. Companies started transferring wages to their employees in real time. Some people even took out and paid millions of dollars’ worth of loans without needing any personal identification documents.
Here are some of the things you can do with DeFi:
– Send money anywhere in the world
– Fixed currencies accessible
– Can be borrowed with or without collateral
– Token can be traded
– Insurance can be purchased
- Borrowing with secrecy: Banks check whether a loan is likely to be repaid before lending. In a decentralized lending system, the parties do not need to identify themselves. The borrower must provide a collateral that the lender automatically receives if the loan is not repaid. Some lenders even accept NFTs as collateral. This way, money can be borrowed without a credit check or handing over private information.
- Access to global funds: When using a decentralized lender, funds deposited from all over the world can be accessed, not just funds in the custody of the chosen bank or institution. This makes loans more accessible and improves interest rates.
- Fast loans: Fast loans allow borrowing without collateral or any personal information. While they are not widely available at the moment, there are hints that they may become more accessible in the future. Usually the funds used are held in liquidity pools (large pools of funds used for borrowing). If they are not being used at a given moment, this creates an opportunity for someone to borrow these funds, do business with them, and repay them in full, literally the moment they are borrowed.
- Lending: In DeFi, the traditional financial institution is replaced by a smart contract. A smart contract is a kind of Ethereum account that can hold money and send/repay it according to certain conditions. Once in use, no one can change this smart contract. It always works as programmed. Contracts are also publicly available for anyone to review and audit. This means that malicious contracts will usually come under community scrutiny fairly quickly.
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