Decentralised Finance (DeFi) is one of the most revolutionary trends in the world of cryptocurrencies, which is rapidly changing the traditional financial system. DeFi offers an alternative to banks and other financial institutions, allowing users to access financial services directly, without intermediaries. This movement has already raised billions of dollars and continues to grow. Let’s take a look at how DeFi works, its benefits, challenges, and impact on the global economy.
1. What is DeFi?
DeFi, or decentralised finance, is a blockchain-based financial application ecosystem that offers traditional financial services such as loans, deposits, asset exchanges and investments without the involvement of banks or other centralised intermediaries. All transactions are conducted using smart contracts – automated programmes that execute the terms of the transaction without the need to trust a third party.
The main platforms for DeFi are blockchains such as Ethereum, Binance Smart Chain and Solana, which support the creation of decentralised applications (dApps).
2- DeFi’s main services and products
DeFi offers a wide range of financial services that are made available to every user with internet access. Here are some of the key products that are changing the traditional financial landscape:
(a) Lending and Borrowing
One of the most popular areas of DeFi is lending. Platforms like Aave, Compound and Maker allow users to lend cryptocurrency and earn interest. It’s a fully automated process that doesn’t require a credit history or bank approval. Borrowers can use their cryptocurrencies as collateral to get loans without selling their assets.
(b) Decentralised exchanges (DEX)
Decentralised exchanges such as Uniswap, Sushiswap and PancakeSwap allow users to exchange cryptocurrencies directly with each other, without the need for a centralised exchange such as Binance or Coinbase. This makes the exchange more secure and anonymous, as users retain full control over their assets.
c) Yield farming.
Yield farming is a process where users provide their liquidity to DeFi platforms in exchange for rewards. In effect, they “lend” their assets to platforms to increase liquidity and receive interest payments or new tokens in return.
(d) Stablecoins
Stablecoins are cryptocurrencies pegged to the value of fiat currencies (e.g. US dollar or euro). Stablecoins such as USDT, USDC and DAI are widely used in the DeFi ecosystem to minimise volatility and conduct stable transactions. They play an important role in DeFi’s lending, exchange and other financial services.
(e) Derivatives and synthetic assets
DeFi is also actively developing derivatives and synthetic asset markets, which allow users to trade derivatives or assets that mimic the value of real assets such as gold, oil or equities. This opens up access to new investment opportunities without the need to own physical assets.
3. Benefits of DeFi
DeFi offers a number of unique advantages over the traditional financial system:
(a) Accessibility
DeFi allows anyone with internet access to use financial services without the need to open a bank account. This is especially important for people living in countries with limited access to banking services.
(b) Transparency
All transactions in DeFi are recorded on the blockchain and can be publicly verified. This creates a high level of trust and transparency as all transactions and contracts are open for verification.
c) Autonomy and control
DeFi users have full control over their funds and transactions. Unlike traditional banks, there is no need to entrust their money to third parties. This makes the system more secure as there is no risk of bankruptcy or fraud by intermediaries.
(d) Innovation and high returns
DeFi offers users the opportunity to earn higher returns than traditional banks through lending, income farming and other instruments. Innovative products and services make DeFi attractive to investors looking for alternative ways to generate returns.
4. Challenges and risks of DeFi
Despite its many benefits, DeFi faces a number of significant challenges and risks:
(a) Lack of regulation
DeFi operates without the involvement of regulatory bodies, which poses certain risks to users. In case of fraud or loss of funds, there is no recourse to regulators or recovery of assets.
(b) Technical risks
The smart contracts that underpin DeFi may contain bugs or vulnerabilities. Hackers have already exploited these vulnerabilities several times to steal funds from DeFi platforms. This emphasises the need to audit and improve the security of smart contracts.
(c) Market volatility
While stablecoins help mitigate volatility, most cryptocurrencies remain subject to significant price fluctuations. This can lead to losses for users, especially those who leverage in a highly volatile environment.
(d) High fees
On some blockchains, such as Ethereum, transaction fees (gas) can be very high, especially during periods of high network load. This makes DeFi less accessible to users with small amounts.
5. The future of DeFi
Decentralised finance continues to evolve and more innovations can be expected in the coming years. DeFi is expected to be the backbone of the new financial landscape, offering more accessible, transparent and innovative solutions. The introduction of new blockchain platforms with low fees and improved scalability could make DeFi accessible to millions of new users.
Conclusion
DeFi is a revolutionary concept that challenges traditional financial institutions. It provides users with the ability to manage their funds and access financial services without the involvement of banks. However, DeFi also faces a number of challenges, including technical risks and lack of regulation. Nevertheless, with the development of technology and the introduction of new solutions, DeFi has every chance to change the future of the financial system and make it more accessible to all.