The crypto world has been rocked by a new wave of excitement and emotion: DeFi - Decentralized Finance. What is this about decentralized finance and why is there so much excitement around these new blockchain applications?
DeFi are software programs that use the characteristics of blockchain to provide financial services. They are smart contracts or DApps that provide banking or financial services.
Computing and the internet have already brought disruption to many different industries that touch us intimately. These technologies have changed the way we buy, what we wear or what we eat, the news we read or the movies we watch and even the way we work or interact with family and friends. In all these areas, services and products adapted to the needs of each one have been created and can be customized according to individual tastes. Why would our personal finances be different?
The blockchain allows you to create financial applications tailored to your portfolio, needs and future prospects using computing and the internet.
But why do we need financial services? Financial services are a step in the evolution of money technology in civilization. Money has evolved since direct exchanges, has gone through precious metals and currently the most used form is fiat currencies - controlled by governments and central banks. These developments allowed the constant development of society. It made it possible for each worker to specialize in their area, improving their resources and increasing their productivity.
For example, banking services allow an agricultural company to borrow to obtain resources and be able to purchase a tractor. With this advanced tool, the same worker is able to increase his productivity and harvest more food. The company increases its profits and consumers have more food at their disposal. The whole society stands to gain by the service that the company has enjoyed.
However, traditional financial services are controlled by companies over which we have no control. And more serious than that, they do not have the transparency to understand what they do with what money we invest there. Blockchain, through decentralized financial services, allows investors and users to be able to know all the movements that are made with the company's assets. But, it also allows you to maintain the privacy of the company, since it can control what data it publishes. The blockchain succeeds in combining transparency and privacy!
DeFi is a movement that aims to create a transparent financial system, open to all and without a central authority.
Transparent because, as we have seen, your applications will be based on a chain of blocks that allows you to access and view any and all transactions made.
Block chains can be accessed by anyone with an internet connection. This is the only requirement to access it. In fact, you don't even have to be a person. A smart device can create a bank account and use banking services if it fulfills the conditions of the smart contract it proposes.
Authority is passed to the network and users from the hands of government, central banks or another central entity. They will be the ones who will define all the blockchain rules. Smart contracts or DApps that want to use that network will have to follow these same rules. That is, in addition to opening the doors of banking services to everyone, we are giving them the possibility to own the bank itself.
Currently, more than $ 3.6 billion is invested in this space. The growth in recent months has been exceptional. Since the beginning of June, the total amount allocated to this type of investment has more than tripled.
What financial services are available at DeFi?
There are several banking services that have already started to be exploited by various applications that use blockchain:
- Loans - some lending platforms have been created that use blockchain and its characteristics to grant loans in a transparent and fast way. In these types of loans you usually deposit a crypto and receive it in a fiat or a stablecoin. But there are also platforms that allow loans to be granted if sufficient amounts are stored. The biggest innovation of the space, in this context, is, in my view, you could be the one to lend assets and receive interest on it so that others can take advantage of the loans granted. In other words, a community appears in which you can be on both sides: borrowing or lending. This mechanism brings incentives to the entire community: those who receive it have more financial resources available, those who grant assets to the network to grant loans receive interest on their assets.
- Decentralized Brokers - there are several platforms that allow you to make crypto exchanges directly with other users. The advantages of this service are offered by the characteristics of an open blockchain: it is available to anyone, it is instantaneous and the transaction fees will be lower than a centralized broker.
- Derivatives - this service creates tokens that represent assets and track their valuations. Due to computing capabilities, it is possible to create financial mechanisms that replicate variations in the valuation of stocks, precious metals or other cryptography. In this way we open the financial markets to all those who want to invest and can still maintain their privacy.
- Payments - this other service is being explored by the decentralized finance space. Alternatives are being explored to make Bitcoin faster and reduce transaction fees. An example of this service is the Lightning Network.
- Assets - this type of service allows you to use your cryptography in different ways and try to maximize the returns you can have with them. For example, the yearn.finance protocol will use the assets you deposit there to maximize the return you can get by managing between various lending platforms.
This is the new space that is leaving crypto-investors looking for ways to improve their investments and maximize their returns. You can read more about these mechanisms (in English) and consult all the services that exist in DeFi on the defipulse website.
