Banking has always been run by bankers, the people who arrange everything from savings accounts to secured debt. But what if computer code takes their place? This is the purpose of what is known as Decentralized Finance or DeFi. DeFi proponents claim they can create a world where money flows more efficiently and fairly. Critics say that all DeFi does is re-create the hype, unjustified speculation, and the possibility of losing money on crypto.<ol><li>What is DeFi? DeFi revolves around programs known as decentralized applications (dapps) that perform financial functions on digital ledgers called blockchains, a technology created for bitcoin but later widely adopted. Dapps allow people to lend or borrow money from other people, go long or short across a range of assets, trade coins, or earn interest on a savings account. Transactions are governed by rules embedded in software called smart contracts. Many of these applications can also connect to each other and work together to create complex financial services.</li><li>What is a smart contract? You can think of an auto payment at a traditional bank as a smart contract — it will withdraw money to send to your mortgage company on the first of every month until it is told to stop. DeFi contracts can be much more complex. DeFi applications are designed to operate independently by linking counterparties directly, without the need for a centralized intermediary. Once a smart contract is launched, it usually cannot be changed or tampered with by anyone. Many of the smart contracts run on a blockchain called Ethereum.</li><li>Can you give the most typical example? All DeFi applications work differently, but the general approach is that people can connect a cryptocurrency exchange account to a DeFi application and then lend or borrow some of their coins. Many typical DeFi transactions are much more complex, for example, some people buy ‘wrapped Bitcoin’, an Ethereum network token that is backed 1:1 with Bitcoin and is designed to speed up DeFi transactions. Such users enter into complex agreements using multiple DeFi applications to increase their income.</li><li>How is this different from “fintech”? There are companies that allow so-called peer-to-peer (P2P) lending, which funnels capital from investors to borrowers without the traditional intermediary of a bank, but they are still the companies in control of the process. The creators of dapps strive to create a platform that is not controlled by them, but on which counterparties interact directly with each other.</li><li>How significant is DeFi? Since many smart contracts require collateral from counterparties as a guarantee, analysts track the growth of dapps by looking at the amount of money actually locked in the DeFi ecosystem. At the end of August, the total amount of collateral people poured into DeFi applications exceeded $7 billion, according to the DeFi Pulse tracker. At the same time, at the end of May, the amount did not exceed $1 billion. (Even despite this growth, DeFi is far behind the total cryptocurrency market, estimated at $360 billion.) There are more than 200 DeFi applications, with new ones appearing every week. The first dapp to become widespread was MakerDAO, launched in 2015.</li><li>Why is there so much focus on DeFi right now? Several DeFi apps like Compound debuted this summer and promised triple-digit returns. This immediately attracted dozens of speculators. In the long term, the idea of ​​globally accessible financial services that are not dependent on banks and other companies that can go bankrupt in an unstable global economy amid the Covid-19 pandemic is becoming increasingly attractive.</li><li>Who benefits from this, except for speculators? More than 1 billion people worldwide still lack access to basic banking services. DeFi promises to offer anyone with an internet connection and a mobile phone access to a full range of banking services, which means the ability to earn income from their savings. One group of people who are turning to dapps in particular are the so-called miners of bitcoin and other cryptocurrencies. Mining is a computational process used to verify the transactions of a currency and is paid for by it. Miners are often unable to obtain credit from traditional financial institutions.</li><li>What are the pitfalls? As with everything in digital currencies or software in general, DeFi accounts are vulnerable to hackers. A simple mistake in the code can destroy funds. An example is the Yam Finance project, which which quickly raised $750 million and crashed a few days after launch when a bug in its code prevented the application from working properly. The internal logic of dapp is also able to increase or decrease the issue of the coin in the future, thereby changing its value. That’s exactly what happened to Ampleforth, whose market capitalization dropped nearly two-thirds in less than three weeks over the summer. There is no deposit insurance for DeFi applications, though this could change as development teams like Nexus Mutual start building something similar to insurance in the DeFi ecosystem.</li><li>What are the reasons for the possible fiasco? Since there are no banks or other intermediaries to exercise control, users of DeFi applications must be very careful in everything they do: the transactions they perform cannot be reversed. DeFi users also need to have a good understanding of exactly how a particular service works by studying the relevant white papers and tutorials — otherwise, there is a risk of unpleasant surprises. Another source of risk: many DeFi ideas are so new that it is unclear whether they comply with current regulations. Many analysts believe that DeFi is another hype project that will not last long. Like any explosive trend, it has a chance of failing once the hype subsides. However, now the main pool of projects is at the stage of rapid growth, which allows many to make good money on the new trend. The rapidly developing system of decentralized finance attracts more and more users and creators of future applications and protocols. But remember that despite everything, DeFi is the same financial instruments that are characterized by high volatility and instability. Even being the most secure and transparent system, decentralized finance does not reduce these risks in any way. Before you start investing your money, familiarize yourself with the system in more detail, study a specific protocol, choose a strategy and decide on your risks. </li></ol>For more information visit: <a href="https://coinmarketcap.com/community/profile/crypto4light/" rel="noopener noreferrer nofollow">CMC Community</a> | <a href="https://twitter.com/vladi4light" rel="noopener noreferrer nofollow">Twitter</a> | <a href="https://t.me/crypto4light" rel="noopener noreferrer nofollow">Telegram</a> | <a href="https://bit.ly/crypto4light" rel="noopener noreferrer nofollow">Youtube</a> |

DeFi: a financial dream come true without financiers

crypto4light

Other articles published on Jun 25, 2023

Over 25.5 million ethereum staked, more ETH holders withdrawing from exchanges

Weekly Analysis: Markets Gain Big as Bitcoin Dominates

Analyst: Climbing Above $0.5025 Could Push XRP to Higher Levels

If Ethereum Breaks Resistance, is the Target $2000? June 25th ETH Analysis

Unconfirmed reports say Ripple considering buying back 10 billion XRP, skeptics doubtful

DOGE and SHIB Price Analysis for June 25

Join our free newsletter for daily crypto updates!