The question of what is De-Fi can be briefly answered as a “decentralized finance system“. Explanation of the word; It is in the form of “decentralized finance”.
As can be understood from this definition, the concept of De-Fi refers to financial structures that are not dependent on any authority. In these systems, there are no decision-making authorities and the systems do not have a specific center.
However, De-Fi does not only cover financial instruments for money transfer.
- Decentralized stock market
- Transactions such as taking and giving credit can also be included in the activities in the De-Fi system.
De-Fi is a decentralized, open finance contract built on blockchain contracts. In other words; The transparent financial service flow that everyone can access is called “De-Fi”.
It regulates relations such as investment, trade, credit, and borrowing. The production of digital asset tokens is carried out through De-Fi systems. On the other hand, this system offers individuals the opportunity to make investments and leveraged transactions. Smart contracts for transferring assets between protocols and platforms in a fast and practical way are developed through De-Fi.
Advantages of De-Fi Systems
The main purpose of the De-Fi system is to make the finance mechanism a demographic structure. In this respect, De-Fi offers alternative solutions for people who cannot use traditional financial systems.
De-Fi system, which aims to reach people who do not have access to banking systems, eliminates dependence on authorities and centers.
Accordingly, the advantages of the De-Fi system can be summarized as follows:
- It facilitates access to financial services. In doing so, it lowers the cost.
- With its universal availability, it is a good alternative for people who cannot benefit from banking services.
- Eliminates middlemen. It gives users the freedom to control their assets.
- It offers higher processing speed and greater flexibility. It may take days or weeks for some transactions to be concluded in banks. Whereas, transactions on De-Fi are completed in a few minutes.
- With the DeFi system, the owner decides how the money will be spent. You don’t have to rely on the judgment of financial managers and investment advisors.
- Brokerage houses and traditional banks keep the money in the account. By lending the money to others, they get the interest or use it as collateral. Whereas, De-Fi offers you the ability to hold your own funds.
- Banks have certain working hours. Transactions can always be made on the blockchain.
- There is no need for an arbitrator to settle disputes between the parties.
- You can use De-Fi applications in investment firms and banks without the obstacles that you may encounter. In order to benefit from these applications, there is no need for a government-issued ID, credit history, or brokerage account.
How to Earn Income with De-Fi?
The most popular methods of passive earning with De-Fi are lending, staking, liquidity mining, that is, yield farming. Yield farming is based on taking user-owned cryptocurrencies and investing in them.
A portion of the assets belonging to the investors is shared in the liquidity pool. This pool allows distributing funds to other projects over De-Fi protocols.
What are De-Fi Usage Areas?
After the 2008 crisis, the confidence of many people in banks was shaken. Factors such as the ability of governments to manipulate valuations at any time and the potential to print unlimited money have triggered the idea of a decentralized system.
One of the first and most important assets that emerged in this field was Bitcoin. This De-Fi structure, where people can be both users and administrators, paved the way for different De-Fi systems.
Blockchain has made the financial field more liberal; users have gained a system that can safely protect and transfer their own assets. The usage areas of the De-Fi system, which emerged as a rival to the traditional financial system, can be listed as follows.
Decentralized Debt Exchange
Users can connect their cryptocurrencies and other assets as collateral and exchange debt within minutes.
Cryptocurrency prices change daily and sometimes there are big jumps. In order to prevent this volatility, stable cryptocurrencies have been released.
Their prices are based on nominal assets. The biggest advantage of stable cryptocurrencies is that the crypto value units it provides are free from volatility. This makes dApps and De-Fi protocols more accessible.
Uniswap and similar broker-less DEXs give the user complete control over the exchange of crypto assets. Thus, there is no risk for crypto assets.
De-Fi usage areas also include smart contracts. These systems allow making payments in a more secure and transparent way through smart contracts.
Even if cryptocurrencies are locked in smart contracts, this is not enough to protect them from contract vulnerabilities. Smart contracts cannot be guaranteed to be 100% secure and are always likely to result in loss. De-Fi makes it possible to get decentralized insurance and minimizes the risks in this regard.
Control of return on investment and cash flow is provided by fund management. In De-Fi protocols, passive and active fund management is performed in a decentralized manner. In this way, users can monitor how their funds are managed and more easily understand the cost they have to pay.
Disadvantages of De-Fi System
Although De-Fi emerged with the aim of radically changing the traditional understanding of finance, it is still at the beginning of the road. The fact that it is not widespread enough around the world can be shown among the disadvantages of De-Fi systems.
Users who made a mistake may not be able to undo it. It is difficult for users in regions without the technological infrastructure to access De-Fi systems. On the other hand, in the De-Fi system; There are also liquidity, credit, and market risks. In addition, De-Fi carries legal risks for both project investors and project participants.
For example, it is possible for some people to abuse their lack of regulation for their own benefit. Projects with fraudulent purposes may be developed and some of the users may suffer from these projects.
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