Elimination of centralized banks, intermediaries and organizations from the financial world; DeFi works to achieve this goal. In this article with the help an essay From the Bainance Academy website, we explain in simple terms everything you need to know about the field of decentralized financial management.
What is Decentralized Finance (DeFi)?
Decentralized Finance refers to a set of applications that can perform important finances such as loans and financial transactions in a decentralized manner without the need for intermediaries. In other words, it is not the defense of a project, but an ecosystem of hundreds of different projects, all of which provide decentralized financial services.
Banks and centralized organizations have long dominated the financial world. Today, if you want to borrow, buy or sell, or pay your installments and taxes, you have to go to a bank, government or other centralized organization. All over the world, people trust governments at all times, assuming that governments are clean and that the value of national currencies is protected. People around the world trust banks on the assumption that they are honest trustees of their money. They trust intermediaries at all times in the hope that they will receive perfect financial services.
But history has shown that centralized intermediaries can commit corruption or unintentional error. The field of decentralized finance has come to eliminate the corruption, unintentional error and the need for centralized trust by using the Blockchain and the concept of decentralization.
We can also define difai as: a movement to create an open source financial services ecosystem, without the need for a transparent license that is accessible to all and without centralized intermediaries. In this way, the user has complete control over their assets and communicates with the ecosystem through decentralized applications (Dapps).
With its great goal, Difai can be considered alongside the Blockchaink as one of the most promising innovations of the digital age.
What are the main benefits of Defai?
The traditional financial world depends on institutions such as the bank (as an intermediary) and the court (as an arbitrator). Defy programs, however, do not require any intermediaries or arbitration. It is the programming code that determines how potential disputes are resolved. Most importantly, users have complete control over their assets.
In the utopia of Defai, no one can confiscate your money, oversee your finances, or prevent you from doing business with someone else. Corruption and theft are also minimized, because everything is transparent to everyone.
In addition to eliminating intermediaries, the use of defai can reduce costs and enable the creation of an invulnerable financial system. Although it is not easy to remove centralized banks and organizations from the financial world, it seems that we are at the beginning of a powerful process.
Thanks to the Blockchain, progress in decentralized finance can be expected. The data is stored on a blockchain and distributed to all people connected to the network. With this technology, the possibility of information change, censorship or system failure is almost eliminated.
Another advantage of such an ecosystem is the easy access of all people to financial services, especially those who cannot use the current financial system. Because the traditional financial system depends on the profitability of intermediaries, these services are not provided properly in low-income communities. However, with Defai everyone can use financial services at a very low cost.
Most parts of the financial world can benefit from defa, but today most of the activities in this field can be summarized in three general parts:
Getting a loan and lending
Decentralized lending protocols are one of the most popular applications of the Defy ecosystem. Free and decentralized lending has many advantages over the traditional credit system. Interesting features of blockchain-based lending platforms include instant payment, the possibility of collateral with digital assets, and the need for no credit checks.
In these systems, liquidity providers can make a profit by placing their assets on the platform, and other people can borrow from that liquidity.
Because these services are offered on public blockchain, the need for trust is minimized and transparency is very high. In general, decentralized lending systems reduce contractor risk and make it cheaper and faster for more people to use.
Monetary banking services
Given that DeFi programs are by definition financial programs, monetary banking is one of the obvious applications of these programs. These services can include the issuance of Stable Coins, mortgages and insurance policies.
Given the growing trend of China’s blockchain industry, there is a strong focus on creating stable coins that, like Tetra, have a fixed value but are also decentralized. A stable coin is a type of digital currency that is backed by a stable asset or commodity such as the dollar. For example, a stable dollar-denominated digital currency (such as Tetra) is backed by dollars and is always worth one dollar.
In the case of credit services, in the traditional system, due to the existence of many intermediaries, the process of registering a mortgage and collateral is very costly and time consuming. By taking advantage of smart contracts, legal and underwriting costs are significantly reduced.
On the other hand, issuing insurance on the Blockchaink eliminates the need for intermediaries and greatly reduces the risk of insurance policy breaches. In this way, while maintaining the quality of services, the amount of insurance can be reduced.
According to experts, decentralized exchanges will play an undeniable role in the future of financial transactions, and these exchanges will include defenses.
In decentralized exchanges operating on the Blockchain, traders can buy and sell digital assets directly and directly. These transactions are done from users’ personal wallets.
Because a centralized organization cannot control exchange processes, transaction fees are very low; However, there are still challenges to the network’s own transaction fees.
China’s blockchain technology can also be used to issue and offer ownership of a large number of financial instruments. By creating a decentralized platform, these programs eliminate the need to trust trustworthy organizations and, with the help of distributed head office technology, do not have a single break point that is likely to be attacked.
For example, in the field of defai, tools and resources can be provided for the issuance of stock tokens (securities) with which individuals and businesses can create digital currency for assets such as stocks and real estate and consider their own parameters for it.
Derivatives markets (futures and options) as well as forecasting markets (such as agar) can be a subset of Diffay.
Where do defy programs run?
The core of decentralized finance is the smart contract, because decentralized applications work with it. Therefore, blockchains that host smart contracts can also host defaults.
While regular contracts use legal materials to determine the relationship of the people involved in the contract, a smart contract uses computer code.
Thanks to the Blockchain, a smart contract will have a performance guarantee once implemented. The developer sets the terms of the contract in the code, and after registering it on the Blockchaink, even he himself can not stop the execution of the contract.
Using smart contracts is faster and easier and has less risk for both parties. Smart contracts, on the other hand, still face legal challenges and, for example, the legal authorities still do not recognize a smart home ownership contract. Also, since smart contracts are unstoppable, a bug or malicious code can be dangerous.
Ethereum is currently the largest platform that Diffie projects can work on. It is no exaggeration to say that Ethereum currently hosts more than 70% of the entire Defai ecosystem.
In addition to Ethereum, IAS, Tzos, Theron, Cardano, Neo, Algrand, and dozens of other Blockchains are able to host decentralized finance programs.
What challenges does Defy face?
The most important challenges that Diffa faces are:
Blockchains are currently slower than their centralized competitors, and this affects the work of decentralized applications. Ethereum, for example, the main host of Diffie projects, can now only process 14 transactions per second. Of course, despite the various scalability solutions and potential improvements, this problem will most likely be solved in the near future. It goes without saying that dozens of defy projects are already working well on these slow-paced blocks.
Possibility of error on the part of the user; Everyone is responsible for their own property
As we have said, Defy eliminates financial intermediaries and leaves all the responsibility to the users. For example, if you lose your bank account password, you can retrieve your account by going to the bank, but in open blockchains such as Ethereum, you have an identity with a text string of letters and numbers called a “Private Key” It is determined that if you lose it, you will lose access to your wallet balance forever. Also, blockchain transactions are non-refundable, which means that if you deposit money into the wrong wallet, you will probably not be able to get it again. For this reason, distracted users are at risk when working with Difai.
Bad user experience
At the moment, using a small DF domain is complicated for novice users, and current applications still do not have a good user interface as they should. For a typical user, privacy and decentralization are not the first priority. Ease of working with this domain can be an incentive for users to leave centralized systems, but without a proper user interface and easy access, decentralized applications can have little to say in terms of number of users. The development of mobile software for defy applications is one of the most important issues to consider when it comes to user experience.
Decentralized finance is a broad field that seeks to provide the financial services needed by individuals by eliminating intermediaries. With the help of this area, we can move towards a freer financial system; A system that is accessible to the whole world and prevents corruption, censorship and discrimination.
Defy’s decentralized applications run on blockchains that host smart contracts. Ethereum is currently the largest Difai host.
Defy’s potential for figuring out different futures is extremely high; A future in which we manage our finances without the need for banks and intermediaries and have full control over our assets.