Decentralized financial systems are already actively competing with traditional mechanisms for managing user assets. They allow you to exclude intermediaries from the fields of investment, insurance and lending, as well as optimize and regulate the relations between the participants in transactions.
This resource will help you understand how DeFi works, why it is used, and why it is of particular interest to both financial service providers and their clients.
DeFi: what it is and how it works
DeFi advantages and disadvantages
Where Decentralized Financial Services Are Applied
DeFi (Decentralized Finance) is a collection of financial services based on open computer code chains (blockchains). Clients using such services are completely equal in rights, and the applications themselves are in wide user access.
DeFi users collaborate in most cases using smart smart contracts. They are digital analogs of traditional contracts, with the difference that electronic documents automatically control the fulfillment of the terms of cooperation by the parties.
Smart contracts relieve parties to transactions from having to resort to third-party services, such as legal and banking services. As a result, DeFi users can freely and openly regulate the flow, distribution and accounting of funds.
The absence of unified centers of refusal in the blockchain opens up an extensive list of opportunities for users of decentralized finance services. The main benefits of DeFi include:
• the opportunity to reduce the time required to fulfill the terms of cooperation by the parties;
• elimination of ambiguous interpretations of contract parameters;
• low commission costs;
• availability and ease of use.
However, decentralized finance applications and systems are a relatively young branch of software development. Many of these services still have obvious disadvantages, such as:
• irreversibility of financial transactions. DeFi is based on blockchains that do not allow you to reverse or reverse transactions;
• low speed of data processing. As a rule, blockchains process funds transfer transactions noticeably slower than classic payment systems;
• lack of universal DeFi services. The applications presented today are designed for small-volume tasks.
Nevertheless, the development of new frameworks for decentralized financial platforms already now allows you to work with DeFi quickly and comfortably.
Perhaps the most telling example of DeFi's work is the decentralized cryptocurrency exchange (DEX). These trading platforms provide users with the ability to exchange digital assets directly. They do not have a single center for control and processing of operations. This allows you to significantly reduce your transaction fees. In addition, cryptocurrency rates on DEX are less dependent on large transfers of assets between investors, as is the case on centralized platforms.
However, exchanges are not the only example of successful use of the power of decentralized finance. Where else is Decentralized Finance most promising?
DeFi can be used in custom asset insurance systems to optimize policyholder performance and automate customer payments. Already today, digital investment insurance services are provided by such projects as Cdx and Ethersc, which guarantee the safety of their investors according to the model of insurance funds.
In addition, decentralized insurance services can be used by analogy with deposits in classic banks. Investors have the opportunity to make contributions to the general fund, for which the system pays them a percentage for the use of funds.
One of the most promising applications of decentralized finance systems is the creation of DeFi credit services. They allow to increase the quota for issuing loans and borrowings due to the publicity of cooperation between lenders and borrowers, which takes place in an open peer-to-peer network. This means that literally everyone who can pay the collateral specified in the agreement with the lender is able to receive borrowed assets.
Another undoubted advantage of decentralized lending is the high speed of payments. Banks and lenders often spend a lot of time processing information about the borrower and assessing his solvency. The DeFi lender will process and execute transactions automatically and noticeably faster.
Financial services of decentralized banking services can seriously compete with the services of classical banks. DeFi Banking already offers an extensive range of loan and deposit services on general terms to all customers.
Decentralized banking services are able to provide security guarantees to their depositors by linking their digital assets to stable electronic coins (stablecoins). The value of a particular stablecoin is determined by the price of one of the national currencies. In some cases, DeFi banks can act as a stablecoin issuer, which greatly simplifies and speeds up lending and asset insurance services.
The development of decentralized financial services is a logical consequence of the development of the digital economy. Their main goal is to create a workable alternative to classical money management systems. With more and more intermediary services included in their pricing by traditional banks, DeFi has the potential to revolutionize the way finance is handled by creating safe and affordable tools for investing in independent digital assets.