What is decentralized finance (DeFi). Explaining in simple terms

Decentralized finance (DeFi) is a set of specialized applications and financial services based on the blockchain Uniswap clone script (a continuous sequential chain of blocks containing information built according to certain rules).

What is decentralized finance (DeFi)?

Explaining in simple terms:

The main idea of DeFi is to create an independent and transparent financial ecosystem that is not affected by regulators and the human factor.

Simply put, with the help of DeFi, finance becomes available to anyone: users conduct transactions and resolve financial issues directly with each other, and not through intermediaries in the form of banks, courts of brokerage organizations, etc. Software for a decentralized ecosystem allows buyers, sellers, and creditors to interact and borrowers.

The difference between centralized (CeFi) and decentralized financial systems lies in how their users achieve their goals.Uniswap clone At CeFi, users rely on the people behind the business and on the regulatory framework. In the case of DeFi, users rely entirely on technology, code, and encryption algorithms.

Usage example on “Secret”

“The biggest theft in decentralized finance history took place on August 10, 2021. The Poly Network Internet protocol was hacked as a result of a major hacker attack. A hacker named Mr. White Hat managed to steal $611 million.”

(From the news about the hacking of the DeFi-based internetwork protocol.)

Fact:

The DeFi boom came in the midst of the coronavirus pandemic. In 2020, the decentralized finance market has grown steadily, adding several billion dollars every month. “The idea that anyone, anywhere in the world can access a system where you can make transfers and choose your own financial risks is very powerful. This is something that until now was inaccessible to many, ”Vitalik Buterin, the founder of the Ethereum cryptocurrency, said in 2020.

What shapes the DeFi ecosystem?

Stablecoins are cryptocurrencies whose value is pegged to the underlying asset (for example, Tether USDT is pegged to the US dollar).

Farming is any action aimed at obtaining tokens for any activity, as a rule, providing one’s own computing power for performing block chain calculations.

Issue of tokenized shares. In fact, this is an analogue of traditional securities, but with the advantages of blockchain . There are several ways to use such tokens: a debt or investment instrument, a derivative, a digital share. There are also token baskets, which are the decentralized equivalent of ETFs.

Decentralized Exchanges (DEXs). They do not have an exchange operator, as well as the need for registration, identity verification and commissions. Instead, payments are handled by smart contracts. The platform does not access the funds and does not store the assets of its clients, that is, in fact, there is a real exchange without an intermediary.

Cryptocurrency loans. Some users provide their coins, while others take them. Decentralized platforms automatically enforce loan terms and distribute interest. To borrow money, you will need to provide the platform with collateral.

Synthetic assets are the creation of derivative financial instruments (derivatives) on the blockchain. These include contracts that mimic the price behavior of the underlying asset (stocks, bonds, options, futures, currencies, interest rates, etc.).

Prediction markets — platforms that allow you to bet on the results of events, games, elections, etc.

Asset Management.

Benefits of DeFi:

• Easy access to financial services, especially for those who for some reason are isolated from access to the current financial system.
• The rules for carrying out business operations are written in a smart contract. Once it’s up and running, the DeFi app can run on its own with little or no human intervention.
• Control over the ecosystem is evenly distributed among all network members.
• Transactions are completed quickly and without a chain of intermediaries, which reduces commission costs.
• The source code of the applications is open for review, which allows any user to understand the functionality of the contract or identify vulnerabilities.
• Anyone can create an application and use it. New services can be created by combining other products.
• Unlike the traditional financial sector, there are no controllers or accounts that require complex forms to be filled out.

Disadvantages of DeFi:

• No financial institution in any jurisdiction of the world is responsible for the actions of participants within the system. Therefore, it will not be possible to ask for help or service. If the user loses the password or does something wrong, these are exclusively his problems.
• High volatility , including interest rates.
• Regulatory Uncertainty: The authorities clearly do not like the inability to control financial flows, therefore they can impose bans or otherwise interfere with the work of DeFi.
• Lack of funds. Compared to loans in the traditional finance sector, the amounts that can be obtained under the appropriate security are relatively small.
• Infrastructure failures and hacks of smart contracts. If a critical error occurs in any of the protocols, there is a risk of vulnerability of the entire system, through which you can penetrate to any point in the chain.
• Fraud. In 2021, cybercriminals stole over $10 billion in investments using decentralized finance technology. Fraudsters issue dummy tokens and lure investors with promises of extremely high returns. Uniswap clone software The standard scheme is to wait until the trading in the pool “warms up” and the price of the token jumps up, and then withdraw all the liquidity and disappear with the money.
• Excessive hype. An overheated market runs the risk of bursting sooner or later.
• Poor performance when accumulating a large number of transactions.
• Blockchains are inherently slower than their centralized counterparts.
• Ecosystem chaos. Finding the most suitable application can be quite a challenge.
• The high cost of commissions for launching smart contracts, which can “eat” all profits.