Decentralized finance or “DeFi” (deep eye) is a new financial system that operates independently and does not depend on centralized financial intermediaries such as banks, credit unions or insurance funds. Instead, users have the ability to transfer, trade, invest, and trade between peers using cryptocurrencies and digital assets through automated smart contracts, eliminating the need for these slow and expensive intermediaries. DeFi is based on advanced distributed ledger technology (DLT), or blockchain, which aims to disrupt the current financial order and enable a more transparent and fair financial system. Another distinctive feature of DeFi is that it extends the blockchain from simple data or value transfers to more complex financial use cases such as trading, lending, yield farming, flash lending, and derivatives. About the Author Kadan Stadelmann is technical director of Komodo L'industrie exploding in 2020 during the `` DeFi Summer '', or the total value verrouillée (TVL) in the DeFi intelligent contracts strongly increased, passing by quelques centaines de millions of dollars à plus 20 billion American dollars in a few months. While it's still small compared to the traditional financial system, interest and investment in the space doesn't appear to be waning any time soon. In short, DeFi is an open financial system without authorization and without borders.
What about traditional finance?
In addition to being slow and expensive for your customers, centralized financial systems are also vulnerable to attacks, data breaches, and security flaws. Think of it like having all your eggs in one basket. If your money is in the bank and the bank decides to increase its commissions, makes a bad investment, is stolen or goes bankrupt, the client loses. In DeFi, products, applications, and services, as well as the assets they serve, are decentralized and therefore free of those points of failure that can be found in centralized financial systems. Traditional financial systems are also inaccessible to millions of people who do not meet the criteria to open a bank account. It may seem strange to those living in developed countries or wealthy regions, but insufficient identification and access to capital, geographic isolation, and government oppression prevent millions of people around the world from accessing traditional financial services. Cryptocurrencies and DeFi do not discriminate and allow anyone with an internet connection to access financial services easily, cheaply and fairly.
Where does DeFi come from?
While the term DeFi took off in the summer of 2020, the story really started with Bitcoin (BTC). Bitcoin, by design, is inherently decentralized and gave rise to the idea of DLT as a way to create decentralized networks for people to transact. When Bitcoin was first launched in 2009 by anonymous cryptographer Satoshi Nakamoto, people began transacting through a decentralized, crypto-based peer-to-peer network. It is this use of blockchain that has led to the development of the trillion dollar cryptocurrency ecosystem we see today. In just 12 years, Bitcoin has created an entirely new financial system worth over €800 billion and a new set of financial ideals based on transparency and freedom. Satoshi Nakamoto's vision was to give people back their freedom through a P2P financial system. Bitcoin was the first coin to achieve this goal, but that's just one example. While Bitcoin itself is the backbone of DeFi, this is only the first chapter of the story. After 2009, other networks began to emerge with a similar vision of building a new financial system.
What are the advantages of DeFi?
Decentralized finance gives users the flexibility to transact and trade anytime, anywhere with just an internet connection. The most immediate benefits of DeFi are instant or blazing fast transfers and drastically reduced fees and charges. Also, since there are fewer intermediaries taking a piece of the financial pie, users receive additional benefits not seen in traditional finance. For example, DeFi lending protocols typically offer much higher interest rates on deposits, as well as lower fees and more favorable terms for loans and lines of credit. DeFi offers the possibility of providing equitable access to financial services. There are millions of people who do not have access to financial services due to isolation, lack of funds, political oppression, etc. Another benefit of DeFi is super-high-yield trading known as 'yield farming', which allows investors to borrow and lend their cryptocurrencies at much higher rates than traditional banking and investing.
Smart contracts and the future of global finance
The future of decentralized finance looks very healthy. As the world increasingly strives for a digital and decentralized future, we are already seeing tokenized assets including digital gold, non-fungible tokens (NFTs), and artwork become more common, while many governments around the world are seeking to establish bank digital currencies (CBDCs). The use cases for smart contracts are exponential, from DeFi to gaming, real-world tokenized assets, conditional payments, gaming and betting applications, and prediction markets. As decentralized technology continues to revolutionize the way people and organizations interact, exchange information, and access financial services, smart contracts and DeFi will continue to create transparency and financial freedom.