📈What is Decentralized Finance?

What is DeFi?

Most beginner’s guides will advocate a financial system where services can be provided without middlemen. While it certainly contributed to the narrative that captured the mind of early adopters, it does not resolve the question at hand: how can DeFi improve my life? We find answers in this article.

What can DeFi do for me and my money, right now?

That’s the question you’ve been asking yourself all this time, right? Well, we figure it out here for you.You understood it, DeFi inherits from the blockchain security and decentralization, meaning participants trust the technology itself instead of relying on intermediaries. As a result, the range of applications is at least as large as existing financial services, if not wider: lending, borrowing, insurance, stablecoins, GameFi, and others. Disruption is happening at a fast pace and the full potential likely hasn’t been seen yet.

How it works?

Envision a world where thousands of banking tech stacks are replaced by a single open, transparent algorithm, operating autonomously on Ethereum. In this scenario, the end user would only bear the cost of developing a single protocol, eliminating the need for multiple expenses.

For example, with a team of fewer than ten engineers, the remarkable Uniswap protocol manages trillions in trading volume.

This is what the future could look like. End-users would receive the exact same financial services they do today, but operated in a slightly different manner:

In the realm of traditional finance, a user wanting to accomplish a specific financial goal typically pays a financial institution to execute the desired task while safeguarding her funds. This could involve simple tasks like custody services, currency exchanges, earning interest on savings, or more complex operations.

In DeFi, the landscape operates on a fundamentally different structure. Paying for the operation of a service wouldn't make sense since the underlying code is open source, allowing anyone to replicate it (fork). However, users are responsible for covering all aspects that can't be easily copied. This encompasses the protocol's network, which encompasses factors like the current state of smart contracts (such as liquidity), brand recognition, and future improvements.

As a result, DeFi protocols' natural business model revolves around capturing a portion of the value generated by their networks, rather than profiting solely from their code. To thrive amidst competition and potential forks, these fees are reinvested to enhance and expand the network itself. This includes bolstering security measures, implementing protocol improvements, and building a strong brand presence—all for the ultimate benefit of the users!

DeFi is flexible and transparent

In the traditional financial world, the best yields come with longer-term engagements. That is commonly referred to as a positive yield curve. The longer you lend your money, the higher you get compensated in return. The question is: are you willing to lock your savings for 5, 10, or 20 years for a fixed — and historically low — interest rate? DeFi compounds interests in real-time. Moreover, as there is no central authority that takes control of your funds, you can put money in or out on demand.Adding to that, the transparency of the blockchain enables any participant of the network to verify each transaction and weed out the good from the bad. While it’s not sufficient to avoid harmful behaviors, it does allow market scrutiny and therefore better pricing of risks.