De-Fi is part of a single ecosystem of applications related to finance and built on the basis of blockchain networks. The Decentralized Finance project is designed to develop a transparent and free financial services system that is open to a wide range of users and operates independently (without involving third parties). Thus, the participants of the system retain unprecedented control over their own assets, and users interact with this ecosystem through the peer-to-peer protocol.
Among the main advantages of decentralized finance, it is worth highlighting the simplicity and convenience of access to financial intermediation services. This is especially convenient for users who, for various reasons, do not have access to the current FIN system. Among the probable advantages of De-Fi, it is necessary to note the modular flexible framework, as well as the ability to interact with applications working with public blockchain networks. This can be a decisive factor for the emergence of fundamentally new financial:
Today we will talk in detail about what DeFi is, as well as about the advantages, opportunities and risks of decentralized finance.
The main advantages of DeFi
The classical system of finance focuses on the following institutions:
- Banking organizations acting as intermediaries.
- Courts guaranteeing the settlement of disputes.
As for DeFi applications, they do not need courts and intermediaries – all potential disputes are resolved using code, and control over assets lies entirely on the shoulders of the user. This approach minimizes the costs of providing and using products, and also creates a more stable financial system.
Software deployment for an innovative type of financial services is performed on top of the blockchain, so the presence of a single point of failure in the functioning of the ecosystem is automatically excluded. Data fixation is performed in the blockchain, after which they are distributed among numerous nodes. This allows you to almost completely eliminate shutdown or censorship.
At the same time, it is worth noting that with the help of the framework, decentralized finance applications are created in advance, so the process of their development is characterized by simplicity and maximum security.
The next advantage of this open ecosystem is the ease of access to financial services for people who, for various reasons, do not have access. It is known that the deployment of a traditional financial system is based on profit-making mediation, so in most cases they do not provide services where the level of profitability of users is low. However, DeFi can significantly reduce operating costs, therefore, for citizens with a small income level, access to the required financial services also opens up.
De-Fi Usage Options
There are several proven working options:
1.Lending and loans
One of the most popular types of DeFi applications is considered to be open lending protocols. When compared with conventional lending, open loans and loans can boast of a number of advantages, namely:
- express transaction processing;
- the possibility of turnover of digital financial assets;
- absence of any credit checks;
- the prospect of standardization.
It is known that lending services in DeFi applications are based on public blockchains. It follows from this that the level of trust in these applications is minimal. But at the same time, a guarantee of the effectiveness of data verification by means of cryptographic algorithms is provided. De-Fi lending protocols minimize counterparty risks and make loans/credits as fast, convenient and accessible as possible for a wide range of consumers.
2. Financial and banking services
All Di-Fi applications are essentially financial applications, therefore, monetary and banking specialized services for decentralized finance become quite obvious. They can be presented in the form:
- stablecoin release;
- mortgage lending;
With the development of blockchain technologies, the development of stablecoins (a kind of cryptocurrency tied to an asset) they began to pay maximum attention. Such coins are easily transferred in digital form. Due to the high volatility of cryptocurrencies, De-Fi-stablecoins are accepted for everyday use in the role of digital finance, not issued and not controlled by central authorities.
Since the number of intermediaries in obtaining mortgage loans is not small, this process is characterized by a long registration period and cost from a financial point of view. And it is smart contracts that make legal fees and underwriting as cheap as possible.
With the help of insurance, you can get rid of intermediaries and start sharing risks between all network participants. This approach allows you to reduce insurance premiums without reducing the quality of service.
3. De-Fi markets
It is difficult to evaluate this type of application unambiguously, since the decentralized finance industry itself opens up a huge number of opportunities for a variety of innovations in the field of finance.
Individual applications that are considered to be the most important are DEX exchanges. On these platforms, holders of cryptocurrencies can trade assets without involving intermediaries. Transactions between users’ wallets are made through smart contracts.
Such trading platforms do not have a special need for maintenance, so DEX exchanges, in comparison with centralized ones, charge much less commission for conducting financial transactions.
In addition, blockchain is often used to obtain special permits for the use of a large number of classical financial instruments. De-Fi applications operate in a decentralized manner, so there can be no single point of failure.
For example, sites that issue security tokens have the right to give issuers various digital tools that facilitate the launch of tokenized shares. There are also many other projects to create:
- prediction markets;
- decentralized synthetic accounts.
De-Fi and smart contracts
Almost all De-Fi applications (both under development and already available) involve the creation and execution of smart smart contract protocols. Whereas traditional contracts use legal terms to denote the terms of an agreement, smart contracts use software code.
This code specifies the terms of the agreement, and the smart contract applies them independently. Thanks to this, automation of many business processes that need manual monitoring is guaranteed.
It is also worth noting that smart contracts are easier to use and faster, which ensures a significant reduction in financial risks for both parties to the contract. However, unfortunately, this did not become an obstacle to the emergence of new types of risks. The program code is also vulnerable and risks being exposed to various errors, so the personal data of users blocked in smart contracts are subject to various threats.
Difficulties faced by decentralized finance
In fact, there are several of them:
- Insufficient performance
The nature of blockchains is characterized by slower operation compared to centralized platforms. Because of this, there is a need to create new applications. The task of developers in this case is to optimize their applications taking into account these limitations.
- Insufficient user experience
Today, applications of decentralized finance require special efforts from project participants. Therefore, in order for a user to want to prefer De-Fi to a traditional system, they simply have to provide significant benefits.
- Chaotic ecosystem
To find the best version of the application, the user often has to put a lot of effort. To do this, the participants of the system must have a stock of specific knowledge and skills. At the same time, the difficulty lies not only in the applications themselves, but also in reasoning about their compatibility with the global De-Fi ecosystem.
Summing up the results
The De-Fi concept is to create financial services that would be a profitable alternative to traditional systems (both political and financial). With the help of decentralized finance, it is possible to create an open system without censorship and even more so without discrimination.
The idea is very interesting, but not in every situation decentralization is equally useful.
At the same time, if DeFi still achieves the desired result, they will take power away from the leading centralized companies and redirect it to the free software community. However, when decentralization will become mainstream and will be accepted by the absolute majority of users, it still remains a mystery.