What is DeFi (Decentralized Finance)?

DeFi refers to a financial software built on Blockchain, called decentralized finance. Its purpose is to enable anyone with access to the Internet to make loans and banks without any discrimination and without the need for a center or intermediary.

To better understand DeFi, it is first necessary to take a look at how traditional finance came to be. Historically, central authorities have issued currencies to support their own economies. Central banks and institutions were expected to carefully manage and regulate the outstanding money supply. As the size and complexity of the economy grew and the trust of more people was gained, central authorities gained more power. People hoped to make a profit when they transferred control of their own money to a centralized system, but over the years this system has led to a situation where one has little say over one's own money.

In traditional finance, the money is controlled by the middleman, not the owner, but in the DeFi system, users retain control of their assets and interact through peer-to-peer (P2P), decentralized applications (DApps). Thus, DeFi aims to create an open financial system and minimize the need to rely on central authorities

 

THERE IS A MAJOR PROMISE IN BLOCKCHAIN ​​TECHNOLOGY: “DO NOT TRUST, VERIFY.”

Because with a Blockchain network, every single transaction that takes place on the Blockchain can be verified individually. The DeFi system provides tools to create and control a financial system without the need for central authorities with technologies such as internet, cryptography and Blockchain. Since there is no middleman or center, the resolution of possible conflicts is determined by a code. Thanks to the protocol structure provided by smart contracts, the system works automatically if the rules are implemented. Another purpose of the DeFi system is to provide trust to the participants as well as decentralized financial services.

 

Almost all DeFi applications are built on the Ethereum Blockchain network, the world's most popular programmable blockchain developed by Vitalik Buterin. Rather than a central authority, it oversees the decentralized issuance of the network's native cryptocurrency, Ether (ETH), by the participants in the network. Anyone with an internet connection can access and interact with smart contracts built on the Ethereum Blockchain network. Thus, users can verify the code of smart contracts and choose which services are most suitable for them.

DeFi's most popular applications are built on borrowing and lending platforms. Similar to a bank, users deposit their money and earn interest from other users who borrow these assets. Thus, it is ensured that credit conditions are applied and interest is distributed through smart contracts. And all this is achieved without the need for people to trust each other or the intermediary bank. As a result of this system, people get higher returns and understand the risks more easily thanks to the transparency of the Blockchain network.

 

There are many different DeFi services and applications. Tokens called stablecoins are important to the DeFi ecosystem. Stablecoins, called stablecoins, are designed to hold a certain value and are usually pegged to a currency such as the US dollar. The first and largest DeFi application is MakerDAO, founded by Rune Christensen. Here, a stablecoin, DAI, is pegged to USD and backed by Ether (ETH). For each DAI, $1.50 ETH is locked inside the MakerDAO smart contract as collateral.

 

In time, it will be expected that the laws of the existing states will adapt to the changing financial system and the place of DeFi in the financial world will become clearer.

Share: