Decentralized Finance, also known as Decentralized Finance or DeFi, is the advanced ecosystem that relies on blockchain technology to deliver financial services decentralized.
This system is considered one of the prominent innovations that arose through blockchain applications and smart contracts. DeFi started as an initiative
To develop financial instruments based on decentralized infrastructure, and quickly
It has evolved to include many diverse products and new markets.
In the context of the DeFi-centric economy,
Users have access to financial applications similar to those found in
The traditional financial system, but without the need to deal with central intermediaries. from
Through the use of open source protocols created on decentralized and non-decentralized networks
Controllable, DeFi enables users to unrestricted access to global financial services, allowing them to interact with multiple applications to leverage advanced financial products.
in
In this context, in this article we will clarify the concept of decentralized finance, and how
The work of this system, and the distinction between it and traditional and central financing. We'll review
Also the innovations it presents to digital currencies, and we will discuss related matters
Potential risks in DeFi and how to deal with them effectively.
The difference between decentralized finance and centralized finance
Before the advent of DeFi systems, the financial system was mainly based on Centralized Finance CeFi. In this context, control over financial operations is entirely centralized in the hands of a central entity, which represents a long-standing tradition in the financial sector.
1. The concept of centralized finance (CeFi)
before
With the advent of decentralized finance, cryptocurrency trading was mainly done through
During traditional finance, which used to constitute a large part of the cryptocurrency market.
Centralized exchanges, or CEX,
Process all trading requests in this system. In this context, it is managed
Centralized exchanges by a specific team that supervises the funds, which means
Access to trading wallets requires the use of a private key.
In addition
In addition, central exchanges determine which digital currencies are available for trading
And the amounts required to participate in this system. For example, when you trade
Cryptocurrencies are sold via a central exchange, which does not actually own the currencies and is subject to rules
and regulations imposed by the stock exchange.
2. The rise of decentralized finance (DeFi)
The emergence of blockchain and Bitcoin in
The year 2009 sparked great optimism about a radical transformation in financial markets. And I contributed
The global financial crisis of 2008, which led to increased costs
The increasing reliance on intermediaries enhances the desire to explore alternatives to services
Central Finance. However, it was necessary to wait until mid-2019
For a decentralized finance system to become visible and begin to attract interest.
Use
Advanced technologies of blockchain and smart contracts provide individuals with access to...
Financial services 24 hours a day, 365 days a year, while maintaining control
full of their money. Thus, DeFi allows for the elimination of intermediaries, reduces the associated fees, and smart contracts enable direct interaction between parties.
Using blockchain technologies, DeFi ensures that...
The ability for anyone to block others' access to their money, making it an important development in...
Traditional finance, where everyone - regardless of their personal situation - is in control
In their money and access to financial services at low costs.
What is a decentralized finance system?
Prepare
Decentralized finance, increasingly known in the world of crypto and blockchain,
An innovative financial infrastructure characterized by the absence of dependence on central banks or agencies
Governmental. This financing ecosystem is a platform that adopts smart contract principles
Blockchain technology facilitates transactions between parties directly, without the need
There are intermediaries or central institutions that intervene in the process.
This decentralized finance infrastructure includes a variety of custom applications, known as decentralized applications (DApps).
Which provides many financial services to individuals and companies, including loans,
International money transfer operations, and investment opportunities in the stock market.
In this context, relying on these decentralized applications is essential, as...
A decentralized finance system can sometimes be described as a collection of these applications
Built on Blockchain technologies and smart contracts.
one
The distinctive characteristics of this system are its ease of access, which enhances the possibility
Providing financial products and financing solutions without the complications of applying for
Approvals from traditional central institutions have a long wait. through
Decentralized finance, anyone can participate in the role of lending, trading,
Providing liquidity without intermediary, which opens the way for a freer financial experience
And transparency.
How does decentralized finance defi work?
the system
Current finance depends largely on central financial institutions that require large sums of money
of capital and complex risk assessments, which restricts access for new users
It hinders the development of new financial products. However, blockchain and finance are advancing
Decentralized infrastructure is available to everyone, working to provide a transparent financial environment
And innovative beyond traditional restrictions.
from
On the other hand, the basic structure of blockchain technology is based on the idea of provenance
Open, allowing anyone with an Internet connection to access a global financial system without...
The need for an intermediary to manage its assets. Relying on the infrastructure itself (block).
Chain), DeFi applications are built on a foundation of security and transparency, which...
It provides a highly reliable environment and seamless communication between various applications.
based
This decentralized system is based on digital currencies, blockchain technology, and contracts
Smart. This system relies on cryptography and smart contracts to provide services
Finance, where users can benefit from decentralized applications that provide services directly to them.
While
Regarding cryptocurrencies, the owners of currencies such as Bitcoin and Ethereum
They have the opportunity to access various financial services without the interference of traditional banks or...
complex verification procedures, and they can now negotiate loans, purchase derivatives,
And participate in investment activities more easily and at low costs.
The most important terms in the field of decentralized finance (DeFi)
Decentralized Finance (DeFi) : Represent
A system that seeks to achieve independence of users from central structures such as banks,
Central finance platforms, allowing them to access financial services without intermediaries or
Central control.
Centralized Finance or Conventional Finance CeFi or TradFi: refers to a financial system that relies on a centralized structure for access or authorization of financial services.
Decentralized Exchange (DEX): An operational platform based on specific protocols that eliminates the necessity of a central intermediary in trading operations.
Blockchains: An information recording technology that operates in a distributed manner and ensures transparency and security, while maintaining an accurate record of all transactions.
Decentralized Applications (Dapps): Applications based on smart contracts that operate efficiently through the interaction of many participants.
Smart Contracts: Contractual software stored in the block chain, which automatically executes agreements based on specific conditions.
Uses of decentralized finance DeFi
1. Digital stablecoins
Stablecoins are an essential part of DeFi.
It enables the representation of fiat currencies such as the US dollar and other assets
On the blockchain as digital tokens. Stablecoins are intended to represent value
Real assets and maintaining the stability of their value through various mechanisms.
Varies
Stablecoins are designed to provide a variety of guarantees to maintain
Linking them, these designs include stablecoins backed by fiat currencies,
Decentralized stablecoins and algorithmic stablecoins.
Fiat-backed stablecoins represent fiat currencies on the blockchain and are backed by off-chain collateral. As an example, TrueUSD (TUSD) is a USD-backed stablecoin backed by an off-chain bank account.
2. Decentralized Exchanges (DEXs)
progress
Decentralized exchanges are an opportunity for developers to launch digital tokens and access a market
Great liquidity without relying on traditional centralized structures. Users can
Move between digital assets freely and securely, interacting directly with contracts
Smart.
Automated Market Makers (AMM), as an effective offshoot of DEXs,
One of the most impactful developments in this field is where processes are being transformed
Trading from the traditional central ordering system to side mechanisms using pools
On-chain liquidity.
3. Infrastructure for decentralized financial markets
considered as
Financial markets are one of the basic pillars of economic success, as they are a platform
To intersect borrowers and lenders. Tremendous economic activity arises from the ability to
Borrow and earn returns on invested capital. It is worth noting that enabling
Financial markets have traditionally been in the hands of central bodies, giving them control
This is a major aspect of the global economic system and the flow of money from it
Nah.
As for
Now, decentralized money markets have been able to provide opportunities for users to borrow
Lending using digital tokens through smart contracts built on...
Block chain technology, in an unauthorized manner without custody. These markets are managed
It is open sourced by a community of participants, giving it a democratic character
In determining supply and demand.
4. Synthetic assets
Synthetic assets are instruments
A financial instrument that derives its value from an underlying asset or benchmark, such as tracking the price of gold
Digital gold. In the past, creating these assets was the privilege of large institutions
Due to its need for a high level of confidence and capital at risk. But with
With the evolution of the DeFi framework, anyone can build open source crypto-financial assets, with strong safeguards for their implementation.
Sunday
The main challenges for the security of crypto-assets are obtaining...
Accurate and tamper-resistant pricing data. Since the management of these assets depends on...
From external data sources, Oracle is a critical infrastructure for providing assessments
Reliable on the network.
5. Cryptocurrency mining
Cryptocurrency mining or “yield farming” is a new model based on DeFi to advance
Liquidity and providing a fair distribution of new tokens, in addition to forming an active community
And sustainable. These forms offer rewards to users who contribute to an achievement
Stability and growth of decentralized protocols. The main goal of extraction
Digital currencies are stimulating the use of the project and distributing new tokens with rights
Governance for a broad community.
Yield farming has proven to be an effective way to launch the DeFi ecosystem.
It enhances the network effect and increases the liquidity of the project by attracting more visitors
participants, forming an active community consisting mainly of users of the protocol. Come
Incentives for crop cultivation are varied and numerous, depending on the objectives of each project, and often include:
Exploiting existing infrastructure to design unique reward plans that achieve their objectives
Super efficiently.
Enjoy
Decentralized application developers have great flexibility in defining distinct parameters
For their protocols, enabling them to design unique liquidity mining strategies
Which enhances the growth and prosperity of their target community.
Major players in the world of decentralized finance
In the context of DeFi development, the main players can be classified into five basic categories:
Blockchain technology: Blockchains are essential for providing the infrastructure needed for decentralized finance. Among these chains, the Ethereum network stands out as the main host for most DeFi solutions.
Stablecoins: Through currencies such as USD Coin and DAI, many companies that issue stablecoins contribute to offering financial instruments backed by traditional currencies.
Infrastructure and protocols: Their development is essential to ensure the provision of a variety of services in the decentralized environment. The most prominent of these services are Dapps, smart contracts and oracles are vital tools that enable transactions to be carried out confidently and efficiently.
Asset managers:
DeFi companies play an important role with regard to asset management, whether...
This was in managing investments or providing solutions to its clients. Among these
Companies, names like MetaMask, TrustWallet, and Nansen stand out.Banks, exchanges and liquidity markets: In this category, we find banks, platforms and markets that enable the buying and selling of assets, in addition to the possibility of borrowing and lending.
How to get involved with DeFi
If you want to learn more about DeFi in a practical way, here are some ways to get started:
1. Get a cryptocurrency wallet
“To get started, create an Ethereum wallet like Metamask, and then fund it with Ethereum,” advises Rafael Kosman, CEO and co-founder of TrustToken. He adds: “Your digital wallets are your first ticket to the world of DeFi, so you must be careful to safeguard your public and private keys. If you lose them, you will find yourself unable to regain access to your wallet.”
2. Trade digital assets
Doug Schwenk, Chairman of Digital Asset Research, notes that he prefers to “experience trading small amounts of assets on a decentralized exchange like Uniswap.” "help
This beginners' experience in the world of cryptocurrencies will expand their understanding of the market
Current, with emphasis on psychological readiness for capital loss during learning
Identify preferred assets and platforms and manage risks efficiently.”
3. Learn about stablecoins
Koosman shows interest by saying: “One exciting way to try out DeFi without being exposed to major asset price fluctuations is to use TrueFi, which offers competitive returns on stablecoins (dollar-pegged tokens that are not affected by price fluctuations).
the key
To effectively engage in any new financial model is to start with caution, be humble, and progress
With conscious steps. Please keep in mind that digital assets are in the field of currencies
Cryptocurrency and DeFi are fast-moving and carry a high risk of loss.
Benefits of decentralized finance in the world of cryptocurrencies
Decentralized Finance (DeFi) offers a range of benefits and benefits to individuals and organizations alike:
1. A financial ecosystem available to everyone
Stand out
This point as one of the most prominent features of the decentralized financial system, where this is available
Financial infrastructure for everyone without discrimination or restrictions. While the banking system
Traditional imposes restrictions that prevent some individuals and institutions from accessing services
Finance, Decentralized Finance allows everyone to interact efficiently with the financial system.
Thus, it plays an effective role in reducing financial disparities and dependence on...
Decisions not linked to traditional financial authorities.
2. Secure and instant transactions
on
Despite concerns that may be raised about the security of DeFi, the system provides
The environment necessary to carry out safe and effective financial operations. Technology enables
Used technologies, such as blockchain and smart contracts, enable transactions to be carried out quickly and accurately, while providing high levels of transparency and security.
3. Neutral and reliable technology
Thanks to
Computing and the technology used, decentralized finance can achieve a high level
Of neutrality and transparency. The system allows transactions to be handled without human intervention.
This reduces the risk of errors and tampering. Although there are some risks
Associated with these technologies, they remain a powerful tool for enhancing integrity and transparency in...
Financial systems.
Decentralized finance risks
DeFi is a phenomenon
Emerging finance carries with it a set of risks and challenges. While this represents...
Innovations are a new field of decentralized finance, they have not yet been tested
Long term use or for large scale applications. Formal supervision appears interactive
Increasingly with these systems, with great emphasis on regulation mechanisms. Among the
Risks associated with DeFi :
Lack of protection for consumers: DeFi has been evolving
quickly in the absence of a clear legal framework and regulatory rules. But this emptiness means
Users may find themselves facing difficulties if problems occur
transactions, due to the lack of protection mechanisms similar to those in finance
Central. In this context, banks are required to adhere to minimum capital standards
The minimum is part of stabilization mechanisms, providing the consumer with access to his or her funds
At any time. However, this protection is not available in the DeFi system.
Collateral Requirements: Collateral is an essential part of lending within DeFi. When you provide a real estate guarantee, for example, this guarantee is the source of trust for the loan. Despite this, all lending in DeFi requires collateral of 100% of the loan value or more, which restricts access for many beneficiaries.
Security threats: Although blockchain changes are a complex and almost immutable process, other aspects of DeFi are
You remain vulnerable to security threats and system hacks, which can lead to...
Loss or theft of funds. All DeFi use cases rely on...
Software systems are vulnerable to risks related to security threats.
Cryptocurrency price fluctuations: The value of crypto assets can be greatly affected by market fluctuations, making borrowing and borrowing risky.
Technical complexities: DeFi technologies require high technical knowledge to interact with them effectively, which causes difficulty in use for ordinary users.
Keep private keys: In the context of the use of DeFi and currencies
Cryptocurrency, maintaining and securing wallets is a huge responsibility. Where it is protected
Wallets are powered by private keys, which are complex and unique codes that must be stored
Carefully. If these keys are lost, it becomes impossible to access your assets.
Which makes it lose value without a mechanism to recover it.
The future of decentralized finance DeFi
From striving to eliminate intermediaries in finance to turning basketball clips into valuable digital assets, the future of decentralized finance DeFi is promising. That's why experts like Dan Simmerman, head of financial relations at IOTA, say:
Which is considered one of the leading bodies in the field of research and development for decentralized finance,
The promise and potential that decentralized finance holds goes beyond vision
current, although it is still going through its initial stages.
Simmerman points out that investors
They will soon gain more independence, which will enable them to “distribute assets in different ways
“Creativity seems unattainable right now.” Simmerman adds that decentralized finance holds
It has a significant impact on the big data sector, as it contributes to the development of new methods
To distribute data.
Despite the positive trend, DeFi finds itself facing many challenges, especially when it comes to engaging the general public.
sat down
“The promise is there, and our job is to continue to educate the public about this,” Simmerman said
possibilities, but we must also work hard to develop tools that facilitate...
"People understand these possibilities themselves."
a summary
To conclude this comprehensive look at DeFi,
It turns out that this innovative model represents a radical shift in the field of business
Finance, allowing individuals to interact directly with financial services without the need to
Traditional brokers. Despite its promising potential, DeFi remains vulnerable
risks, which requires dealing with it with caution and continuous learning. Thanks to technology
Blockchain and cryptocurrencies, decentralized finance opens new horizons for innovation
And development in the world of financial business.