What is DeFi? How does it work – Decentralized finance DeFi is the system that does not have a single creator but is built on the Ethereum network, whose applications were invented by Vitalik Buterin. In this article, we will examine DeFi closely and answer all related questions.
Table of Contents
What is Defi (Decentralized Finance)?
Defi is a system aimed at easy access to digital and decentralized financial transactions. It is especially designed for people who do not have access to the current financial system.
DeFi offers advantages with its modular infrastructure. Interoperable defined DeFi applications on the blockchain build the ideal foundation for creating an entirely new financial market. Products have the potential to create options like services.
What Makes DeFi Unique?
DeFi allows people who do not trust the bank to perform their banking transactions with the help of an algorithm created by the system without being dependent on authority.
In this aspect, it differs from other cryptocurrencies. Users connected to DeFi networks also keep the system running. In this context, transactions are carried out over millions of devices spread around the world.
DeFi distinguishes itself with its model with a very low attack rate by capturing this decentralized structure and starting point.
DeFi’s Mission and Vision
Here are the details about the purposes of DeFi:
- DeFi aims to be one of the most important parts of cryptocurrency finance.
- In this period, it wants to grow rapidly and to be preferred globally with applications in sub-branches.
- It aims to transfer financial investment concepts to the digital world by offering financial freedom.
- It aims to achieve permanence and transparency in the crypto money world by directing its timeliness to the most needed credit and risk-free futures investment transactions.
- It has the purpose of being identified as the main driving force of Ethereum.
- It aims to exceed the $900 million worth of decentralized financial investment it has recently earned.
- In this way, which he started by showing himself as an alternative to banking and financial transactions, he tried to replace the basic financial system.
How does it work?
Details about the DeFi working system are as follows:
DeFi is not primarily tied to a single hub. While working on the blockchain system, it is modeled with multiple different application types.
- DeFi applications, on the other hand, work by connecting investor parties over the Blockchain network.
- No intermediary institution is used while obtaining any permission for this transaction.
- The basic element in the working system is smart contracts.
- The smart contract is activated when a user from the DeFi community who wants to give a loan reports it on the network.
- A user who cannot benefit from the banking financial system, on the other hand, gives an order to borrow money through this contract transaction.
- Matching users perform a loan exchange transaction under the secure codes of the contract without intermediaries. In fact, this is the basis of the system.
How to use DeFi?
Using DeFi requires lending, buying, or engaging in futures options. Necessary financial transactions are made using different DeFi applications on the blockchain network.
When trading futures with DeFi, a smart contract is made between two or more parties that depends on the performance of the digital asset to be able to derive the value of a particular asset .
Futures Are Highly Flexible
DeFi futures have very flexible numbers. Because the underlying smart contracts offer tokenized futures contracts that automatically move in the system.
In the DeFi system, an investor can hold cryptocurrencies by engaging in futures to hedge against fluctuations and predict the future performance of the asset. DeFi applications where futures investments can be made are defined as UMA, and Synthetix.
Borrowing from Cryptocurrency Investors
Another use is to borrow money. Those who cannot apply to the bank for a loan for certain reasons can reach cryptocurrency investors who want to lend with applications such as UMA, Synthetix and MarkerDAO, which also have the DeFi ecosystem.
In this area, a value equal to the amount of cryptocurrency is given by one user to another who needs a loan, without an intermediary institution.
While this transaction is recorded with a smart contract, the borrower will pay in cryptocurrencies when the time comes, according to the data in the contract.
In this system, which is no different from getting a loan from a bank, it is more advantageous that details such as complying with the conditions or paying the intermediary commission are not dealt with.
What are the advantages of Defi?
The advantages of the decentralized finance system are listed as follows:
- Benefiting from financial instruments with multiple applications within the scope of DeFi,
- People who can’t get loans from banks and can’t make term investments have the right to invest,
- People with enough cryptocurrencies can give commission-free loans to those in need of debt,
- All transactions are recorded on the Blockchain network and can be viewed by everyone, transparency,
- Thanks to the blockchain, once a financial transaction cannot be recorded for the second time and the risk of fraud is eliminated,
- Thanks to the financial transaction realized with smart contracts, the debtor’s acceptance of the payment terms,
- Transaction within high-tech applications designed on the Ethereum platform,
- 1.7 million people who cannot benefit from banking products in the world can now invest,
- Performing 24/7 online transactions under the conditions of obtaining credit or participating in futures transactions,
- Not subject to geographic or delayed transaction restrictions,
- All of these benefits come with the DeFi ecosystem.
What are the disadvantages of Defi?
DeFi has a structure that will radically change the understanding of finance with its many new aspects. Being still at the beginning of this system causes certain openings on the system.
It has two different aspects that are currently defined as missing.
Although it aims to be usable all over the world, the number of people in its system does not meet this target.
A second problem is a need for a large digital space to keep so many transactions together.
Projects are being developed on the implementation of new software that will record the targeted total capacity as data.
What Are DeFi Altcoin Projects?
DeFi’s Altcoin projects unearthed to bring non-custodial financial services to the mass market by leveraging Ethereum’s interoperability and smart contract capabilities include:
DIA: Known as the transparent and open access, non-profit Swiss Blockchain. DIA is controlled by a decentralized community of DIA token holders within the DeFi ecosystem. DIA’s governance token serves as an incentive to key market players.
Orion Protocol: Orion is an altcoin developed under the leadership of Alexey Koloskov, one of the veteran Blockchain developers and the creator of the Waves exchange, with the implementation of B2C and B2B answers on the multiple advanced liquidity aggregator ever.
In: A non-blockchain-centric altcoin used for processing power and storage, powered by a chat protocol.
Chainlink: The Chainlink network is designed to provide the secure inputs and outputs required for complex smart contracts that can be linked to world data, payments. Since last year, LINK has been on a steady rise with cryptocurrency.
Bancor: An on-chain liquidity protocol that supports automatic exchanges on various platforms. Future timing is a project with capabilities to process BNT trading volume, cash out assets on the blockchain.
What Are DeFi Applications?
The most preferred applications by people and created within the DeFi ecosystem are:
Compound: Known as the second largest application on Ethereum and a developer-specific open source protocol to open the doors to the new financial universe. It enables borrowing transactions in open source financial transactions.
Synthetix: The Satblecoin project is a cryptocurrency that made its debut as Havven, which was expanded just before it was launched on the mainnet in February 2019. The Synthetix platform, on the other hand, has supported over 20 Synths representing fiat currencies, commodities, crypto assets since 2019.
Read Also: Top 13 DeFi Projects 2022 [Best DeFi Coins]
Oikos: Known as a TRON version of Synthetix. It is used for on-chain impact on commodities, stocks, fiat currencies. It is backed by the OKS token.
1inch: Known as the best DEX collector in the market. By providing a single entry point for DeFi, it enables to get the best prices on the platform by ordering multiple DEXs.
Is DeFi Reliable?
DeFi is protected by an unbreakable and non-modifiable mathematical formula. In this context, trust is ensured in all transactions made with DeFi. A cause-effect relationship is established throughout the system.
Read Also: What Are the Altcoins Connected to DeFi?
All of the operations that can be performed are predefined with codes. Even the possibilities regarding the conditions under which the transactions can be made are evaluated. For this reason, smart contracts, decentralized applications, consensus protocols have an important place in DeFi systems.
As a result
The DeFi difference is the ecosystem that offers the opportunity to benefit from decentralized financial transactions. It does not consist of a single cryptocurrency or community. Payments can be made with ETH for their products.
In this context, in order to play an active role in the DeFi system, it is necessary to have a wallet type that can store ETH. With the payment transactions made through this wallet, everyone can create different projects by taking advantage of DeFi supports.