If you want to know what DeFi or Decentralized Finance is and what is the reason why it attracts the eyes of all users of the crypto world, you are in the right place and at the right time.
Just as we have experienced the explosion of ICO (Initial coin Offering) initiatives long ago, today everyone in the crypto space is talking about DeFi. You read it on twitter, YouTube recommends it, a friend asks you and your dog even barks at it.
(Warning: if you have really heard your dog barking “De-Fi, De-Fi” we recommend you go to the nearest hospital).
If you want to know what DeFi is, we could define it as a set of financial services that use smart contracts to carry out transactions. These are executed in an automated way, without intermediaries such as banks or lawyers and they do so thanks to blockchain technology.
5 definitions about DeFi
Since it is a new concept and, many times, difficult to understand, let’s turn to what other authors say:
Cointelegraph: “The term DeFi or Decentralized Finance is the evolution of the well-known FinTech that were born in the 20th century. Its objective is to offer a whole series of services built on a decentralized infrastructure that allows user interaction with the platform directly, leaving intermediaries behind.”
Bitcoin Mexico: “DeFi is an open financial ecosystem of decentralized finance that includes digital assets, protocols, smart contracts and dApps built on blockchain.”
Crypto Plaza: “DeFi is a concept that it created in 2019, to name those open source financial initiatives or projects, with non-permissive architectures, which is governed and executed in a totally decentralized and public way.”
Criptonovato: “DeFi refers to financial services provided by DAO (Decentralized Autonomous Organizations) avoiding intermediaries through smart contracts”
Crypto trend: “They are mechanisms for decentralized financing and the objective is to grant loans as a traditional bank would, but in a decentralized way through smart contracts.”
I imagine that has already become clear so let’s do a brief review of what is the emergence of decentralized finance.
While Nick Szabo had spoken out about the idea of creating Smart Contracts in 1995, it wasn’t until the birth of Ethereum in 2014 that this idea began to become a reality. These smart contracts allowed to expand the functions of a blockchain and gave space to new developments unimaginable long ago.
What was at first just an interesting feature or tool has now morphed into a movement that seeks to decentralize finance globally in a way never seen before.
Between 2018 and 2019, signs of this revolution began to be seen, but only in 2020 has the growth been exponential, to the point of replacing Bitcoin from the main scene.
Between September 2017 and the time of this writing, the total value locked in DeFi contracts has skyrocketed from $ 2.1 million to $ 6.9 billion (£ 1.6 million to $ 5.3 billion pounds). Since the beginning of August alone it has risen by $ 2.9 billion. This has driven a massive increase in the value (market capitalization) of all tradable tokens used for DeFi smart contracts.
Now it is around 15,000 million dollars, almost double than at the beginning of the month. Numerous tokens have increased in value three or four times in a year, and some considerably more. For example, Synthetix Network Token has increased more than 20 times and Aave almost 200 times. So if you had bought £ 1,000 of Aave tokens in August 2019, they would now be worth almost £ 200,000.
Different uses of DeFi
Perhaps through applied examples of this technology it is even easier to understand how decentralized finance works.
– Decentralized lending systems
This is one of the main functions of DeFi today and it consists of a loan system in which a person can ask for a quantity of cryptocurrencies (generally stablecoins) and as collateral must deposit a certain quantity of cryptocurrencies. Eg requesting a loan from Tether leaving Ethereum as collateral.
Unlike traditional banks, they loans are executed almost instantaneously and the conditions in terms of interest are very advantageous. We will simply have to interact with a Dapp, make the required guarantee deposit and we will have the loan money in our possession in a few minutes.
– Decentralized markets
Thanks to the existence of DeFi, the emergence of new decentralized markets such as investment pools, staking systems and decentralized exchanges or DEX, among other things, is possible.
– Payment systems:
DeFi is also used for payment systems, allowing costly intermediaries to be completely eliminated, with agile transactions, resistant to censorship and interoperability with other products.
– Banking and insurance services:
Fortunately, DeFi does not need to be a bank to match many of the services offered by them. For example, there are DeFi protocols that allow users to make certain investments and obtain high profit margins as a result of the interest they have generated.
Importance of DeFi in the blockchain ecosystem
DeFi plays an important role in the evolution of the financial sector for several reasons. Mainly because DeFi expands the functionality and reach of the money since all you need to participate in the DeFi sector is a smartphone. This gives it enormous potential to expand the global economy and it has well proven this by being the fastest growing crypto sector today.
Dapps (decentralized applications)
To understand the scope of DeFi it is interesting to know that it relies heavily on Dapps. These decentralized applications are programs designed to function within decentralized networks. These networks can be blockchains, Tor networks, or distributed ledger technologies (DLT).
In Dapps there is no central authority, corporations or agencies that oversee and approve the business functions of these applications.
DeFi platforms today
Currently the greatest exponents of this movement are:
Aave (Old ETHLend)
Undoubtedly, in next months, fewer and fewer people will have doubts about what DeFi or decentralized finance is, as these will gradually become a fundamental and basic part of the crypto space.