Introduction to Decentralized Finance

Jun 19, 2022 | Learn DeFi

DeFi is an essential component of blockchain-based networks. DeFi is a collective term for financial services/equipment on public peer-to-peer blockchain networks.  With DeFi, you have the same services that existed in the traditional financial world, where you can earn interest, borrow credit, lend, insure, trade derivatives, assets, and more. However, an important division of legacy finance is that through DeFi, this process is not only faster but also decentralized. In short, these services are global, peer-to-peer, pseudonym, and open to everyone.

What’s DeFi?

DeFi is a collective term for financial products and services accessible to anyone who can use Crypto over an internet connection. With DeFi, the market is always open, and no centralized authority can block payments or deny access to anything. Services that were previously slow and at risk of human error are now automated, more secure, and handled by code that anyone can inspect and audit. 

There is a booming crypto-economy where you can lend, borrow, long/short, earn interest, and more. Cryptographic savvy Venezuelans used DeFi to avoid catastrophic inflation. Companies are starting to stream employee wages in real-time. Some have borrowed and repaid millions of dollars worth of loans without needing a personal ID.

DeFi vs. traditional finance

One of the best ways to see the potential of DeFi is to understand the problems that exist today.

  • Some people aren’t granted access to set up a bank account or use financial services.
  • Lack of access to financial services can prevent people from being employable.
  • Financial services can block you from getting paid.
  • A hidden charge of financial services is your personal data.
  • Governments and centralized institutions are free to close the market.
  • Trading hours are often limited to business hours in a particular time zone.
  • Remittances can take several days due to internal human processes.
  • Financial services have a premium because intermediaries need their share.

A comparison

DeFi Traditional finance
You keep your money. Your company holds your money.
You control where your money goes and how it is spent. You need to trust the company to avoid accidentally managing your money B.Loans to high-risk borrowers.
The transfer will take place within minutes. Due to the manual process, payment may take several days.
Transaction activity is a pseudonym. Financial activity is closely related to your identity.
DeFi is available to everyone. To use financial services, you need to apply.
The market is always open. The market is closed because employees need breaks.
Because it is based on transparency, anyone can see the product data and see how the system works. Financial institutions are closed books. It  is not possible to request a record of credit history or assets under management

Reference:

https://wiki.tezos.com/learn/uses-of-tezos/defi

https://ethereum.org/en/defi/#:~:text=growing%20every%20day.-,What’s%20DeFi%3F,deny%20you%20access%20to%20anything

 

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