Decentralized Finance (DeFi) is an innovative financial model based on blockchain technology that allows accessing, exchanging and using financial services without intermediaries, promoting transparency and autonomy. In this guide, we will explore how DeFi differs from traditional finance, its main features, key applications and the challenges associated with this new ecosystem. From sites such as DefiLlama, we can see that decentralized finance currently has a Total Value Locked (TVL) of over $85 billion deposited in its protocols.
Total Locked Value (TLV) at DeFi
How does DeFi work?
DeFi operates on the blockchain, primarily using Ethereum to execute smart contracts. These contracts automate transactions, ensuring that predefined conditions are met. Users access services through digital wallets and decentralized applications(DApps), ensuring the security and transparency of transactions.
DeFi Main Features
In traditional finance, money is controlled and transactions are facilitated by intermediaries such as banks and financial services companies. In DeFi, on the other hand, intermediaries are eliminated. Individuals and businesses can conduct financial transactions directly through emerging technologies, promoting greater autonomy and efficiency.
DeFi, differs significantly from traditional finance in several key respects:
- Open ecosystems: Accessible to anyone with internet, without the need for accounts or permissions.
- Interoperability: DeFi protocols connect with each other, creating an integrated financial ecosystem.
- Pseudonymity: Participation without personal data.
- Autonomy: Smart contracts automate transactions without intermediaries.
- Total asset ownership: Direct control over your assets without third parties.
- Transparency: All transactions are visible and verifiable on the blockchain.
Key Differences with Traditional Finance
- Decentralization: Unlike banks, DeFi operates without intermediaries.
- Global access: DeFi allows anyone with internet access to financial services, without exclusions.
- Efficiency and speed: Fast transactions, no red tape.
- Reduced costs: Less commissions by eliminating intermediaries.
Main DeFi Applications
- P2P Lending: Platforms such as Aave allow direct loans between users.
- Decentralized Exchanges (DEX): Uniswap facilitates the exchange of cryptocurrencies without intermediaries.
- Yield Farming and Staking: Generate returns by blockchain cryptocurrencies on platforms such as Synthetix.
- Stablecoins: Cryptocurrencies such as DAI that maintain a stable value against fiat currencies.
Challenges and Risks at DeFi
- Volatility: Cryptocurrencies are inherently volatile, which increases financial risks.
- Security: Smart contracts can be vulnerable if they are not well programmed.
- Uncertain regulation: Cryptocurrency and DeFi regulations vary and can change rapidly.
- Complexity: The technology can be complicated for new users.
