With the development of technology, serious winds of change are blowing in the fields of energy, law, and finance. One of the most important changes is decentralized finance. At the moment, we all have a bank account. This shows that we are all part of the central authority. But what would happen if we were all the central authority itself? This is where we start talking about decentralized finance. Thus, DeFi is an emerging technology that empowers decentralization in the context of financial practices and hierarchical decision-making, to eliminate third parties with assumptions of safety, security, and centrality, and finally, to enable distributed and autonomous decision-making between parties or peers. At this point, another question comes to mind. Why do we want to eliminate the third party?
One of the most important things when establishing a contract is actually the element of trust. Because the parties try to create a relationship of trust by promising each other that they will fulfill their obligations. And when this trust is not established, they will prefer to apply to intermediary institutions such as banks to meet this element. However, there are situations, such as the 2008 Crisis, that can fundamentally undermine trust in intermediary institutions. And with the publication of the Bitcoin paper in 2008, the financial world realized the change. At the same time, the transaction cost of intermediary institutions is quite high compared to decentralized finance. This has led banks to take different measures. Likewise, today, banks’ interest in digital currency and blockchain technology shows that a strong change is coming.
One last important technology that we should mention about DeFi is the smart contracts developed on phase blockchain technology. This is actually an important element of trust for us. Blockchain technology offers us the opportunity to carry out financial transactions that are decentralized, peer-to-peer, open and transparent, unalterable, secure, and at very low costs. Smart contracts are a transaction protocol developed to perform more complex transactions on this technology.
Thus, we can actually say that even a small development in smart contracts contributes greatly to the development of decentralized finance.
Advantages of Decentralized Finance
The advantages of decentralized finance over centralized finance can be listed as follows:
- Intermediary institutions are eliminated.
- As a result of the elimination of intermediary institutions, commissions paid to the bank are eliminated, especially in remittance transactions.
- The interest rates obtained in transactions such as staking can be higher than the deposit interest rates offered by banks.
- Liquidity Mining
- Fund Raising
- Asset Tokenization
However, there is one thing we should especially mention here, and that is smart contracts. As mentioned above, smart contracts are of great importance for DeFi. Likewise, when the smart contract protocol determines that the necessary conditions for the performance of the performance are met, the performance takes place automatically without the need for any central intervention. This is where the importance of smart contracts for DeFi stems from.
One of the most important elements in the establishment of contracts is trust. However, this trust relationship is not always possible. This is where we use intermediary institutions. However, decentralized finance, or DeFi, offers us the opportunity to go beyond this and become each individual’s own bank. And it tries to ensure the performance of the performance with smart contracts. Banks are trying to adapt to this system. However, there are some elements that need to be considered. This is the deficiencies in legal regulation. For example, it also brings along problems such as how the income from DeFi will be taxed. Of course, another important thing to consider is the fact that these technologies are still very new and evolving every day.