DeFi - Decentralised Finance in a nutshell

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Tokeneo
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4 min reading

In this article we will learn you what is DeFi (Dentralized Finance), how it works, what are advantages of them and much more.

defi decentralized finance

What is DeFi? - DeFi is nothing but decentralized finance. This term is very important especially for the economy. In the traditional market, all financial services that can be used are centralized. In practice, this means that such services are supervised by various institutions, constantly controlling them. The most popular example of such an institution is bank, which has a kind of power over human money, which is entrusted to them, e.g. within a term deposit. Furthermore, money in a bank account can be seized at any time, e.g. in the case of a late repayment of a loan or when you have large debts and a bailiff enters the account. In fact, you only have apparent control over your own funds.

DeFi - Decentralised finance - what exactly is it?

The solution to the problem described above may be the so-called decentralised finances. They involve many actors. First of all, it is about digital resources, but also smart contracts concluded through the use of expanded Blockchain technology. DeFi in practice means an open financial market. All services and tools are not controlled by external institutions, so stakeholders have more control over them. DeFi is a set of applications that are mainly based on the Ethereum blockchain. Therefore, it is possible to:

  • combine them ,
  • to modify them,
  • integrate.

All this after analysis of one's own needs, so there is nothing strange about the fact that more and more people are becoming convinced to such solutions. The basic advantages of decentralized finance are:

  • full control over the funds,
  • safe storage, trading and multiplying of financial resources,
  • lack of control by external institutions,
  • investing in all assets based on Blockchain technology,
  • much lower transaction costs.

As you can see, it is worth to decide to switch to such an interesting alternative, which works especially for those who no longer want to accept the control of banks (or other institutions) over their money.

Decentralised finance - how can it be applied?

DeFi loans and credits

DeFi offers protocols for access to open credit markets. These are currently the most popular applications based on decentralized finance. So far, many companies offer high interest rates (up to 10%) in exchange for loans such as BTC, ETH, DAI, USDT etc. The most popular funds accepting cryptocurrencies capital are: Compound v1, Compound v2, dYdX, Nexo, CoinList, Crypto.com, Aave, DDEX, Dharma, InstaDApp. BlockFi, Celsius, Hodlnaut.

When choosing a fund that offers the most attractive interest rate, the LoanScan tool may be useful.

Decentralized capital markets

Defi gives a lot of space to operate in the financial markets. This ranges from the creation of decentralised exchanges (DEX), which do not require trust in the management body/company, to issuing and holding a wide range of conventional financial instruments.

The use of DeFi is relatively simple, as interested parties receive a number of interesting opportunities, including the creation of smart contracts and their implementation (in such cases it is the codes used that enforce the law, many business processes are then automated). In addition, Defi allows for the express creation of decentralized markets (e.g. stock exchanges where unnecessary intermediaries are never used. Thus, transactions run more efficiently and safely, and people have constant control over them). 

Another example of application could be lending (talking about immediate settlements, but also the use of various forms of security, including digital assets). Decentralised finance can also be easily used in banking, more specifically when issuing stablecoins. As a result, their value will not be subject to major changes. Defi is also an excellent alternative to the time-consuming process of obtaining a mortgage. The elimination of intermediaries will make it much easier to apply for such credits.

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