A Beginner’s Guide to Decentralized Finance
The appearance of bitcoin and cryptocurrencies have innovated the digital world from an economic point of view, especially since the concept of a decentralized digital financial system was born, thus providing financial freedom to people and avoiding total dependence on banks. All of this was made possible by the benefits and freedoms of blockchain and cryptocurrency. To help you give a better understanding of what this means, we’ve made this guide to decentralized finance, or more commonly referred to as DeFi.
Following the evolution of cryptocurrencies, there are different applications that have been found to maximize the use and impact of the blockchain and smart contracts. We’ll be highlighting the fundamental definition of decentralized finance in this article; hopefully, it will shed some insight and give you a general idea of the concept.
What is decentralized finance, or defi?
Decentralized Finance, or DeFi, is a movement/ecosystem of financial applications built on blockchain technology.
You can access these modern financial services through cryptocurrencies, smart contracts and the decentralization of processes, thus accessing all the power of a digital bank directly from your wallet and without intermediaries or a centralized hub managing everything.
The main objective of the DeFi initiatives is to develop small traditional financial pieces but with an extra degree of transparency and decentralization.
These small pieces, as if they were Lego pieces, are combinable with each other, in order to develop an entire ecosystem of small solutions that together form a great solution for finances that invalidate the need for centralized and opaque financial institutions that they no longer add value.
The implementation of DeFi projects brings us closer to a world where anyone could create transparent, fair and efficient financial products, making banks, large finance companies, lenders and insurance companies go into the background, or better yet, completely become unnecessary and disappear. But also a world where anyone can interact with these products freely.
Benefits of DeFi
DeFi initiatives are usually very secure, as they use powerful cryptographic techniques to ensure that the platform, access, and use of them can be done only by authorized persons.
- Enthusiasts of decentralized services will be happy to know that they have high levels of decentralization. In fact, this is the greatest potential of DeFi projects, considering that they have the ability to act without the need for a bureaucratic chain to impose itself over the functions of the platform.
- It does not require the participation of third parties or intermediaries, which means that action on a platform is direct between the user and the platform itself. Trusted third parties are unnecessary because that task will be performed by the blockchain. It is this structure that will keep the record of everything in a safe and immutable way.
- Transparency is another great advantage of DeFi. As they are built on free software, each line of code on the platforms is auditable. In addition, resource mobilizations are auditable, because they all take place on the blockchain.
- Access to a DeFi platform does not have any type of borders or geographical impediments. You can be in any country in the world and access its services without inconvenience.
- DeFi enables access to financial services for millions of people who are not banked. This is undoubtedly a golden opportunity to bring development and financial freedom to those who for different reasons have not been able to enjoy these services.
- DeFi also makes the international financing of companies and projects much easier. DeFi platforms can be designed to please the exact needs of a target audience, in order to bring development and investment where it is needed. And those investments can come from anywhere in the world safely.
- Create a new point of economic diversification and development. In fact, DeFi can signify an important economic development point in the medium term due to the enormous economic potential of cryptocurrencies such as Bitcoin.
Guide to decentralized finance use cases and projects
Now, a guide to decentralized finance would not be complete without discussing its potential application and use cases. The first thing we should ask ourselves about decentralized finance services is their real usefulness in the digital world and how we can use them to our advantage, which is powered by blockchain technology.
In fact, as impressive as this whole new crypto trend is, let’s not forget that its most interesting feature is the potential profits that we can obtain thanks to technology and the interest rates that are generated with our investments.
- Defi proves to lead decentralized lending systems, which are indeed the main attraction of the DeFi ecosystem. This system is very easy to understand and its operation is logical. For example, suppose that a person is looking to lend their cryptocurrencies/stablecoins to promote liquidity and receive interest rates, they can do so whenever they want, similar to how FinTechs or traditional finance work. However, DeFi tends to offer better interest terms and loans are generally approved almost instantly. Gone are the hours in the bank, sending digital documents and waiting days for a response, with DeFi you just have to interact with the DApp, make the required guarantee deposit and you will have in your possession the money you have required in loan, and all in a few minutes.
- Another important use case for DeFi is decentralized markets. Platforms such as decentralized exchanges (DEX), investment pools, financial derivatives, staking systems, prediction markets, and more are possible thanks to the DeFi system. It is in this section that most users are able to make a profit from their investments, as crypto traders do.
- Last but not least, we find that DeFi offers banking services without exactly being a bank. For example, there are DeFi protocols that allow users to make a certain investment, where after a while you can receive that investment back with a profit margin, and all thanks to the interest it has generated. But not only that, there are also DeFi systems that allow the issuance of stable coins (stablecoins), as well as digital identification systems.
The DeFi projects have caused a lot of excitement in the networks and have served greatly for many investors in cryptocurrencies, although it is our obligation as enthusiasts of the crypto ecosystem and decentralization to inform that not every “DeFi” initiative is 100% reliable.
As in all fields that have been successful on the Internet, many scams and fraudulent initiatives have emerged that take advantage of the promising operation of these systems and deceive many investors, thus taking their money. We recommend thorough research on a project before investing in it, in order to ensure the protection of your capital.
To conclude, what are your thoughts on our guide to decentralized finance? For a more in-depth discussion on the topic, we have a dedicate article elaborating the concept of DeFi from an economist’s point of view.
What are your thoughts on decentralized finance, or DeFi? Learn more about the world of cryptocurrency, ongoing trends, and industry insights by subscribing to our monthly newsletters at Easy Crypto.