DeFi – discover decentralised finance!

DeFi (Decentralised Finance) is a new generation of financial services that operates based on blockchain. It is an alternative digital space where you can use your virtual assets to perform a variety of financial operations to maximise your profits. How does DeFi work and what benefits does it bring? Find out in the article!

Where did DeFi come from, and why has it gained popularity? 

The entire history of DeFi is based on the creation of Ethereum in 2015. This decentralised platform enabled the use of smart contracts, i.e. self-executing contracts. Their operation was based on the fulfilment of certain conditions contained in a code. That made it possible to conclude a variety of agreements without the need for intermediaries, while at the same time ensuring that the conditions written in them will be executed. With the development of a secure and efficient virtual space for running projects called the Ethereum Virtual Machine, more and more diverse protocols began to appear on the market that offered value to the user. 

What financial operations can be performed in DeFi?

The protocols in decentralised finance allow you to earn interest, lend, borrow, buy insurance, trade derivatives or trade in exchanges. Each of these operations is devoid of formalities and requires no third parties. It is a completely unregulated environment, which does not mean that it is not safe. The aforementioned smart contracts regulate the course of transactions. As of the date of this article writing, the total value locked (TVL) of DeFi is USD 87.715 billion, and in the past, it has even exceeded USD 170 billion. This demonstrates the huge interest in this sector. 

DeFi – what are its advantages and disadvantages? 

Among the advantages of decentralised finance are those that arise directly from the usage of blockchain and those that characterise the work of the sector itself. DeFi has a high level of security as it runs on the basis of decentralisation and a consensus algorithm. There is no requirement for the involvement of third parties, as all operations are conditional on the terms of the smart contract code. It also has a low entry barrier as you do not need a massive amount of capital to get started in this finance sector. There are also no time or geographical barriers - DeFi is active 24/7. Decentralised finance has a vast project range that users can be interested in, which is growing all the time, making the choice for users very wide. There are no formalities. Operations work efficiently, pseudo-anonymously (only wallet addresses or nicknames are available, with no personal data), and transparently on the blockchain network. 

Unfortunately, DeFi also has some disadvantages. To fully benefit from them, it is worth having a high level of technical and financial knowledge to be able to properly assess the projects. Often, they are linked to technological innovation or solving specific industry problems, such as the blockchain trilemma. Some decentralised applications (Dapp) can sometimes be difficult for beginners to use due to the complex interface. The gas fee, i.e., the cost of performing transactions within the ecosystem, is sometimes volatile. 

Conclusion – why is DeFi important? 

An alternative to DeFi is traditional finance called TradFi. Proponents of blockchain as a technology are aware of the inadequacies that centralisation brings. They are looking for a space where they can commit their time and resources to make a profit while supporting the technologies that present projects. DeFi is not just important from an investment side but also from a technological manner, as it presents ever more advanced solutions to solve current blockchain problems. It is also a space for innovators to create decentralised applications, the usefulness of which will be assessed by the market in the long term.