Decentralized Finance (DeFi) is hot in 2022 and promises to be much hotter in 2023. That’s great, of course, but what is Decentralized Finance (DeFi)? Why are so many people fans of DeFi and why DeFi has a big impact on the world around us as we know it.
We will explain the entire concept of DeFi in detail later and we will include the necessary examples. But perhaps it is good to consider what the financial market looks like today.
The financial world today is dominated by banks. The money in circulation is regulated by these banks and thus they have an enormous influence on the world economy. Too much influence, if you are to believe some opponents of the current financial model.
DeFi rivals this financial system. In the concept of DeFi, there is no overarching organ that exercises control over money flows and the responsibility for this, but this rests with the users themselves. One of the great advantages of DeFi is that additional costs such as personnel costs, profit margins, overhead costs and all those costs that are usually passed on to customers are eliminated.
In the world of DeFi, everything is possible and the established order is challenged by a whole new world and reality: the world that offers payment transactions and other financial services without a profit motive, but which is purely facilitating towards anyone who is willing to make use of it.
But enough for a general introduction. Let’s go in depth and look at what exactly DeFi entails, what you can do with it and what practical examples can be found now of platforms and parties that apply DeFi!
- 1 What exactly is Decentralized Finance (DeFi)?
- 2 DeFi & smart contracts: a golden combination
- 3 DeFi: More than peer-to-peer transactions
- 4 Decentralized Finance vs. Central Banks
- 5 The main benefits of Decentralized Finance
- 6 Various Applications and Examples of Decentralized Finance
What exactly is Decentralized Finance (DeFi)?
We as human beings are very withdrawn if you talk about our privacy. We generally prefer to keep things like how much we earn or how much savings we have private. Just look at yourself. Do you know in your neighborhood how much money they earn or how much savings they have? Do they get that out of paid employment? Or from a benefit? Who is covered by the social assistance schemes and who is not?
No, when it comes to money, we as human being are pretty much on our own. There is therefore little more annoying than when you have to fill in your income tax that a lot of information is already pre-filled by the tax authorities. Simply because they know exactly how much savings you have, which accounts you own, how much money you have received in income and from which angle that is.
Whether you like it or not you don’t have to fill in everything yourself in whats not relevant. What is relevant is that all this quite personal information is simply stored centrally and that an incredible amount of information is known about your financial position, while you may not be waiting for it at all.
DeFi has a solution for that. DeFi does not change the content of financial products or services, but focuses on the transaction. The aim is to remove the intermediary (i.e. bank or insurer or financial institution) from the transaction and thereby to decouple an important commercial aspect from the transaction itself.
Borrowing is therefore still borrowing, investing is still investing and saving is unchanged saving, but nowadays you just do this digitally, online and without the supervision of banks.
DeFi & smart contracts: a golden combination
No control of gourvement sounds nice, of course, but also carries the risk of turning it into a big disorganized mess. And if you still want to save € 1000 of your hard-earned money, it’s nice that both your investment and your earned savings interest are paid back to you, right?
A certain form of control and certainty is therefore required. DeFi works with a winning combination of crypto, blockchain and smart contracts. Smart contracts in particular ensure that agreements made between party 1 and party 2 are guaranteed. And that gives a safe feeling.
The smart contract therefore actually acts as a supervisor. Since the smart contract is simply recorded on the blockchain, you as a user do not have to incur unnecessary costs to your local bank or third party but instead of that you can keep those pennies in your own pocket.
DeFi: More than peer-to-peer transactions
With DeFi, for example, you can think of a peer-to-peer credit construction, in which users can borrow amounts from each other or lend them to each other. But DeFi is much more than that. DeFi is in fact central to the development of countless token sales platforms, investment platforms, lending platforms, crypto management platforms and prediction markets.
Regardless of whether you know these terms or not, you can assume that DeFi will shake the established order of banks and financial services companies to its foundations and that not every bank will roll out the red carpet for this development.
Did you know, for example, that there are still many countries in which sending money within national borders simply costs a considerable amount? It is hard to imagine in the Netherlands, but people in those countries save payments so that they can reduce transaction costs. These costs can easily amount to 20% of a monthly income. Thanks to DeFi, people in these (mostly Eastern countries) can support their friends and family by making periodic payments without costing them a lot of money. We think that is a very nice development.
Decentralized Finance vs. Central Banks
It is of course very cool to say that DeFi and the Central Banks are standing opposite each other and are really rolling up their sleeves. While in practice it is true that the Central Banks and local government are closely monitoring the entire DeFi movement, it is going a bit far to say that the two camps are diametrically opposed.
In practice, it works much better for both sides when a dialogue is possible and the financial watchdogs are included a bit in the story from DeFi. Because it is very simple: when you plan to set up a financial platform, this will logically be closely monitored and it will have to meet a number of important preconditions.
It is therefore important that both camps come closer together and make good agreements about guidelines and implementation. In this way we work towards a sustainable solution that is workable for everyone. In this way, the DeFi camp also ensures that it can further develop towards mainstream acceptance.
The main benefits of Decentralized Finance
- At Decentralized Finance, the paper shop is over. Everything goes digital and that promotes safety, speed and clarity.
- DeFi transcends borders. The computer language is universal and can be used anywhere in the world.
- DeFi is open source, so the underlying code is accessible and insightful to everyone.
- Anyone can use Decentralized Finance.
- The decentralized nature of DeFi ensures that no central body can exert influence on a platform and that there are therefore no commercial interests.
Various Applications and Examples of Decentralized Finance
As mentioned, a loan is still a loan, saving is still saving and paying is still paying. Where DeFi logically works with cryptocurrencies, the ‘old’ world works with fiat money such as Yens, Dollars and Euros.
But what kind of platforms can you think of when it comes to DeFi? We have listed a number of important applications for you and will also give some examples so that you can visit some of these prominent platforms for inspiration.
First, let’s take a look at different categories that DeFi appears in:
- DeFi Trading (crypto trading)
- DeFi Lending (borrowing and lending money)
- DeFi Payments (digital payment system)
- DeFi Infrastructure (DeFi protocols within existing software and platforms)
- DeFi Wallets (to keep your crypto safe)
- DeFi Communities (because we like to talk about DeFi)
We explain the categories a little further for you and give you some practical examples!
DeFi Trading (crypto trading)
Trade always needs multiple parties. You need someone who offers something and someone who wants to buy something. Otherwise it won’t really work. Trading therefore always needs a platform on which supply and demand are brought together.
DeFi Trading platforms take care of this. We list a number of high-profile trading platforms in alphabetical order in which DeFi plays an important role.
- DEX AG
- Gnosis Protocol
- Jelly Swap
- Local Ethereum
- Race DEX
- Market protocol
- Nuo Network
- Set Protocol
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com