One part of the crypto ecosystem that has become very relevant is decentralized finance (DeFi). However, this term is very ambiguous and few people really understand what it means.
In this article we will look at what decentralized finance is and some of the uses to which it can be put.
A financial system
Decentralized finance refers to a financial system characterized by decentralization.
A financial system is the set of institutions that allow the exchange of funds. These institutions in the traditional financial system are banks, insurance companies and stock exchanges, among others.
Decentralized refers to the fact that there is no intermediary agent such as banks in the traditional system. Funds transfers occur directly from one user to another. You can carry out activities such as depositing money, lending, borrowing or making transactions, but without having to deal with that intermediary agent.
This means that you don’t have to accept a bank’s rules to do these kinds of things, such as bank hours, paperwork or the need to provide personal data. At the same time, banks are the custodians of your money and do with it as they see fit.
In the decentralized financial system, on the other hand, there are no timetables, paperwork or personal data. You are the one who has control over your money and what happens to it at all times. You don’t have to ask permission to withdraw it or wait for a branch to open to carry out a procedure or transaction. In fact, you can make any transaction at any time of the day, 365 days a year.
The decentralized financial system is not made up of institutions, but of protocols (companies) that create code-based platforms through which users can exchange funds, which is the purpose of a financial system. Therefore, the decentralized financial system is made up of the different sets of code that give rise to the infrastructures on which users rely to exchange funds.
The basis
The basis of decentralized surety bonds is the blockcchain. This technology is the one that allows to a large extent the famous and long-awaited decentralization.
A blockchain is a kind of payment network maintained by a network of computers in such a way that it is very difficult to hack or alter and therefore very secure. In turn, blockchains serve as a public record of the transactions that take place within it.
What needs to be understood about this technology is that, as its very name suggests (blockchain), it is nothing more than a network of blocks. The main function of the blocks is to collect the set of transactions that have taken place in a certain period of time.
Each block is linked to the previous block by means of hashes, since each block contains a hash of the previous block. The hash is a combination of numbers and letters, which is the result of applying a hash function to a given piece of information in order to, among other things, present it in a compact form.
Thus, in order to modify the information of a block, the hash of this block must be changed, which cannot be modified without first modifying the hash of the previous block and so on. The result is that it is practically impossible to change transaction data.
Therefore, what blockchain technology brings to decentralized finance is that transactions are public and irreversible.
What you can do in DeFi
As we have already mentioned, both in this article and in others, in the decentralized financial system you can do almost everything you do in the traditional financial system with fiat money.
Banks usually give an interest for depositing our savings with them. In DeFi there are different protocols to be able to make deposits. For example, at the time of writing, we can deposit money in the form of USDC (as a cryptocurrency) in the AAVE protocol, and receive in return a return of 2.88% per annum on the deposit.
We can also invest our money seeking a higher return. In the traditional financial system we usually invest in stocks, investment funds, financial derivatives, etc. All these operations can also be carried out in DeFi.
Similar to the purchase of shares, there is the purchase of tokens. On these tokens there are also financial derivatives, which we can buy and sell.
The figure of the asset manager is also present ecosystem, with many protocols with different strategies to achieve profitability with customer funds. However, using these protocols is often complicated and involves a large risk. This is the problem we seek to solve, with a strategy that prioritizes taking very low risk and offers stable and sustainable returns over time.
To summarize all this information, DeFi is nothing more than a new financial system based on decentralization and blockchain technology that connects people directly and where many actions are automated by code and many intermediaries of the traditional financial system are not necessary.
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