Abbreviated DeFi for Decentralized Finance, DEFI is an alternative financial system based on decentralized web technologies, that is to say mainly blockchains and cryptocurrencies (and more generally crypto-assets). If you are new to decentralized web technologies, it may be helpful to read this article first to better understand DeFi.
DeFi is developed alongside the existing financial system, which it complements and competes with.
It differs from the traditional financial system by three main characteristics:
- It is natively digital;
- It operates on decentralized infrastructures;
- It is open to everyone, both in terms of use and consultation and participation in its construction.
DeFi is now characterized by its modularity: this system consists of multiple services focused on specific needs (exchange of crypto-assets, use of stable crypto-assets (stablecoins), loans, derivatives, hedge funds, predictive markets …) Which often combine with each other.
DeFi intends to respond to a number of limitations of the current financial system (inequalities of access, counterparty risks, opacity, etc.) by creating the foundations for a new system rather than making incremental improvements to the existing one.
The sector saw its value deposited in smart-contracts (known as “TVL” for Total Value Locked) at the end of August peaking at $ 7.5 Bn against $ 1 Bn on June 1, 2020.
What is DeFi used for?
By synthesizing, we can lend DeFi and the ecosystem that develops it 4 main uses:
- 1 - Make available (and financially accessible) to everyone, financial services that are currently only accessible to certain (wealthy individuals, large companies, individuals and companies from specific geographic areas or developed countries, etc.) or, conversely, prohibited to some (the Wikileaks organization, for example, had been prohibited by Visa, Mastercard and Paypal from receiving donations in traditional currencies, leading it to accept donations in bitcoins… which have subsequently gained considerably in value).
- 2 - Move valuable assets smoothly, quickly and independently, from one financial service provider to another, anywhere in the world, without having to go through third parties demanding disproportionate fees or who can either block transfers arbitrarily or ask for justifications or justifications which do not always have to be.
- 3 - Improve "the efficiency of capital markets, by making units of value (stocks, bonds, real estate, currencies, etc.) interoperable and programmable on open registers" (analysis of the Multicoin investment fund). According to this point of view, the movement of tokenization and STO - still weak today but promising in the medium term - could enter the domain of DeFi. One could, however, object that the open and decentralized nature of DeFi does not quite apply to traditional tokenized financial assets ... Ultimately, everything depends on the contours that each gives to DeFi: according to certain views, it only includes natively digital assets; for others, it also affects traditional assets when they are tokenized.
- 4 - Bring unprecedented transparency to financial transactions, leading in theory to better auditability and better risk management. In this perspective, it is conceivable that the large audit firms will call more and more in the future on engineers who are experts in the languages ??used by DeFi applications (such as the Solidity language, widely used on Ethereum), thus than hybrid profiles, competent in both finance and the technical aspects of blockchains.
What are the strengths of DeFi?
This new system has several advantages that make it unique:
- It is inclusive by nature: in the same way as on the Internet anyone can create content, share it and undertake without asking for permission beforehand, DeFi allows anyone with an Internet connection to access the financial services offered. , and participate in their development, without having to ask for permission. This is why it is described as "permissionless", non-permissee in French.
- It is resistant to censorship. No entity, no group, no individual can unilaterally oppose a transaction between two consenting parties.
- It is based on an incorruptible ledger: since transactions are registered on a public blockchain like Ethereum, they cannot be unilaterally modified or canceled.
- It is transparent and auditable: the conditions offered to users are transparent and not hidden, and thus auditable by anyone, in contrast to the relative opacity of the traditional financial system.
- It presents a reduced counterparty risk: it is not necessary to trust a centralizing third party for the management of funds or the validation of transactions.
- It makes it possible to program automated or self-executing actions without having to resort to a third party, thanks to smart contracts.
- It is very modular: it combines different protocols, tools, innovations and thus offers high granularity and modularity.
With the DeFi universe emerging, it is difficult to predict its future with much precision. However, it is already possible to analyze certain trends, and to become familiar with its challenges.
