Hello crypto enthusiasts. Today we are discussing a very important topic: DEFI or decentralized finance. You have probably heard of it, but what exactly is it and why is it important?
💱 How can it change the way we manage money?
🔗 Are the events happening in today's blockchain world really that important?
🪙 And what does the term Defi actually mean?
This is what we will try to understand in this article. So let's dive into the heart of the matter.
What is DeFi?
A very simple definition of decentralized finance is that it is a technology based
on blockchains which makes it possible to simplify ordinary financial operations, but with cryptocurrencies without having to resort to any intermediary such as banks for example, and so on.
In the world of decentralized finance (DeFi). Users can interact with each other using various protocols. They can transfer funds, exchange one cryptocurrency for another, borrow, and all this in an honest, transparent and fair way, as the great blockchain intended.
To understand decentralized finance or DEFI, you have to understand the problems that exist in the financial market. The first and most important problem is that there are a very large number of intermediaries. There are good and bad intermediaries, but they are still intermediaries. Intermediaries waste our time. They cost money and they prevent us from quickly carrying out certain operations or transactions.
To get a loan, for example, we go to banks. Banks take money from some people, give it to other people and charge a large fee for this service. As a result, a loan becomes more expensive for us.
Moreover, to buy a security, we must go to a broker. The latter will buy this security from the issuing company, keep it and allow us to buy it with a small markup or a small percentage of fees that we will have to pay for this transaction. In addition to these types of intermediaries, the financial intermediaries who are supposed to help us improve our lives; make our lives even harder.
There are also regulatory intermediaries. Each country has its own rules by which the economy operates and which govern economic entities and financial organizations. In some places, things are allowed while in others they are prohibited. For example, in some countries, margin trading products and futures contracts are allowed. In others, you can use trading options and in still others, all of these things are prohibited.
In general, we are faced with a wide range of significant restrictions and these restrictions seem not to be entirely democratic, at least not always democratic. And something needs to be done about it. This is what the big blockchain teaches us and what it leads us to. It says that intermediaries should be eliminated, that they should not be paid, that they slow down transactions of any kind of assets and that they make them significantly more expensive.
So what are the options?
The idea of DEFI is to remove all the middlemen so that we can interact directly with each other. For example, there are decentralized exchanges. These do not lock your money, they allow you to connect your wallet to the exchange and another person can also connect to the same platform. If you sell an asset and someone else buys it, a decentralized exchange acts as a hub, a protocol for executing that transaction to find a large number of sellers and buyers so that transactions can take place between them.
As a result, it also allows people willing to invest in liquidity pools to earn money, for example by depositing their funds.
This happens because, like any exchange point, it requires a certain amount, for example rubles or euros, and a certain amount of dollars or other currencies like Japanese yen.
It is therefore necessary for the exchange platform to have both of these components in order to ensure the proper functioning of the system. People who invest their money in this system receive interest that the decentralized protocol supports. Therefore, all parties benefit and as a rule, the percentage compared to banks, credit institutions or centralized exchanges is significantly lower. But this does not work with centralized platforms in the Cryptocurrency environment. Because on DEXs, we work with on-chain transactions. That is why, when you need, for example, to transfer your#Ethereumto the blockchain and to another person, it can cost around $10. At the same time, centralized exchanges allow for much cheaper transactions because when you trade with each other, the funds simply do not move. They remain within the exchange platform and the latter charges a significantly lower commission without moving the money at all. In general, there are pros and cons, as usual.
Besides decentralized exchanges, examples of DEFI products are non-custodial protocols for obtaining loans like $AAVE or Compound where you can lend your #Bitcoin or #Ethereum. and another person can borrow it and pay a certain percentage in return.
Again, compared to traditional financial organizations, this percentage will be significantly lower because these protocols essentially allow people to interact directly with each other taking a very small percentage compared to large, centralized, greedy organizations.
There are also protocols for derivatives such as synthetic or Barn Bridges for example, where you can issue a derivative for any asset. So, if futures, for example for classic securities, can be issued by a limited number of organizations and are subject to significant censorship by the regulator, here everything is much simpler. You have to connect to the system and put a derivative product and if there is demand and liquidity for this product, it works.
Crypto explorers, stay tuned for upcoming posts where we will dive deeper into even more exciting aspects of DeFi.
Don't forget to like and subscribe.