DEFI What is decentralized finance and how does it work?
Tags: Blockchain, Defi, Blockchain Technology, Blockchain Startup, Blockchain Development

DEFI What is decentralized finance and how does it work?

The DEFI or Decentralized Finance , are an alternative to traditional finance. Traditional financial services are all products related to means of payment or money management offered by a bank, a financial institution, insurance companies or investment companies, among others.

These traditional finances carry with them a series of obstacles, limitations and regulations that make them little accessible for some and not very attractive for others. Such as high commissions or control by banks and regulators.

Thanks to Blockchain and criptomonedas , the DEFI have come to upgrade, improve and globalize finance such obsolete, placing them at the reach of everyone no matter where you are, if you have access to the Internet anyone can use them .

The traditional financial system

Today’s financial system is the center of most economies. All the functionalities of this system are controlled by centralized authorities such as governments, banks and other financial institutions.

People deposit their money in banks and other financial institutions to save and often deposit fixed and recurring deposits for profit.

The first problem is that when someone deposits money in banks or other organizations, they have no control over their assets. You have little to no knowledge of where you invest your money and how these corporations manage it. So this system lacks transparency.

These centralized institutions invest that accumulated money in the stock markets, in addition to granting loans at high interest rates and making big profits. But only a fraction of these are returned to depositors.

One of the most unfair and under-addressed issues in the existing financial system is inequality in financial services. By some estimates, more than 1.7 billion people around the world do not have access to bank accounts or financial institutions of any kind.

To address these drawbacks of financial systems, the world now has Decentralized Finance (DeFi).

What is Decentralized Finance (DEFI)?

The DEFI are a new financial ecosystem, decentralized, global, transparent, resistant to censorship, without intermediaries and easily accessible, where each user has full control of its assets.

The goal of decentralized finance (DeFi) is to provide a global and open alternative to all financial services that people use today. This only requires an internet connection and a smartphone.

The tools to carry out these decentralized finances are digital assets, decentralized applications (dApps), smart contracts (Smart Contracts) , protocols and decentralized exchanges (DEX).

And the alternatives that this new financial ecosystem offers are decentralized loans, decentralized oracles or non-custodial token exchanges, among others.

Ethereum leads decentralized finance from the beginning with Ethereum-based projects, such as MakerDAO or Augur, but little by little other large platforms in the sector such as EOS, Algorand or Tezos, among others, are preparing to claim their share of the pie.

What do DEFI offer?

Global access to financial services

DeFi applications provide global access to financial services, although local restrictions may apply. To access DeFi platforms such as Maker or Compound Finance, users only require an internet connection and a smartphone, regardless of their location or country.

Complete control over assets

DeFi offers users complete control over their assets as anyone can safely store, trade, and invest their assets on the blockchain, and no middleman handles these assets except smart contracts. Therefore, users have complete control over their assets.

Privacy, security and transparency

With DeFi, users have custody of their wealth and can securely transact without validation from a central party. As all activities are recorded on the blockchain, all transactions are publicly available. Therefore, this offers better transparency than a centralized system, where records can be easily modified.

Payments and settlements

There is a vast and expensive network of intermediaries involved in cross-border payments. But these transactions take days to settle and they charge a hefty fee for their service. DeFi has the potential to completely eliminate these costly intermediaries, making remittance services much more affordable and efficient for the world’s population.

DeFi promises much more than this. Censorship resistant transactions and high returns can also be achieved through DeFi. DeFi applications also provide a flexible user experience and interoperability with other products.

DEFI loans

Among the financial alternatives offered by DEFIs, we can highlight decentralized loans, which have much higher returns than those offered by traditional market funds, even reaching 18%, compared to 2–3% in the traditional market.

Thanks to decentralized finances, you can request a loan without the need for intermediaries.

Despite the scalability problems in its network, if there is a project associated from the beginning to the DEFI it is Ethereum, for example, its products with the stablecoin DAI, have been hailed as immensely interchangeable financial products.

But, although Ethereum has been there from the beginning, it cannot be trusted as competitors are starting to follow suit.

EOS

EOS is a high-performance blockchain platform, one of its missions is to support decentralized applications that provide all the benefits that blockchain technology offers.

“When we talk about DeFi, ETH failed. Ask bitfinex, bancor or any team that wants to implement a simple order book on ETH. The design of EOSIO is based on the initial decentralization lessons of the financial platform bitshares. Speed, low latency, neat indexing, floating point, and c ++ are only available in EOSIO. EOSIO has RAM, network bandwidth resource leasing, bancor, token name bidding, and various anchor token designs on the market. The decentralized future is in EOSIO «.

Algorand

Algorand seeks to provide the same services that Ethereum offers, only with better performance and putting an end to the common security, scalability, and decentralization issues that other blockchains have.

“Our Proof-of-Stake protocol is the first of its kind to support scale, open participation, and purpose of transactions for billions of users. All backed by a sustainable business and a recognized team of experts. “ they say from their website.

As for DEFIs, as announced by its Founder Silvio Micali , Algorand is working on the generation of new fungible tokens and the execution of multi-party atomic transfers (AMPT).

Tezos

Like its competitors, Tezos works to be a tool for the development of smart contracts and decentralized applications (dApps).

“The Tezos Foundation is pleased to announce that 14 new grants have been issued for projects submitted in response to your most recent Request for Proposals (RFP). The Foundation considered proposals for the following categories as part of this RFP: Applications created using smart Tezos contracts (with special interest in finance decentralized or applications “DeFi”) “They say in the blog of the foundation tezos

Of these projects, the one focused on DEFIs is Protofire , a development team focused on smart contracts.

conclusion

DeFi has the potential to change the current financial landscape in a positive way. But it is still a small market and has a long way to go. With new projects and protocols entering the market, the world can look forward to a true decentralized financial system for years to come.