DeFi: The Beginner’s Guide to understand the Trendy Blockchain’s Technology beyond God’s Bankers Anxiety

What is DeFi !?

DeFi, the Decentralized Finance is one area of cryptography that is currently receiving special attention. In its greatest ambition, DeFi aims to recreate the financial system we use today, but in a way that would remove all trusted intermediaries like banks.

Specifically, the term Decentralized Finance can refer to a movement to create an ecosystem of open source, unauthorized and transparent financial services, made available to all and functioning without central authority. Users would retain full control over their assets and interact with this ecosystem through decentralized peer-to-peer (P2P) applications (dapps).

As a result, most of the banks and traditional financial institutions are going to face a lot of problems. Because there is a threat to the traditional currencies due to the cryptocurrencies.

DeFi differs from the traditional financial system by three characteristics:

• It is natively digital.
• It works on decentralized infrastructure.
• It’s open to everyone, too well in terms of use, consultation and participation in its construction.

Today we are at the start of DeFi, and things are moving very quickly. Many projects appear, and existing projects gain momentum. More and more users and therefore liquidity as well as volumes are arriving on the various DeFi applications. User experience, one of the main barriers to adoption by the general public, is improving and decentralized finance is coming to our smartphones.

What are the main benefits 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 everyone can create content, share it and undertake without ask for permission beforehand, Decentralized Finance or sometimes called Open Finance, allows anyone with an Internet connection to access to the financial services offered, and to participate in their development, without having to ask for permission. That’s why he is referred to as permissionless.
• It is resistant to censorship: No entity, no group, no individual cannot unilaterally oppose a transaction between two consenting parties.
• It is based on an incorruptible register: the transactions being
  registered on a blockchain, they cannot be modified or unilaterally cancellable.
• It is transparent and auditable: the conditions proposed to users are transparent and not hidden; moreover the public blockchains are transparent and thus auditable by anyone, as opposed 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 funds management or validation of transactions.
• It allows you to program actions that can be automated or
  self-executing 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 a high level of granularity and modularity.

What are the potential use cases for DeFi?

Borrow and lend

Open loan protocols are one of the most popular types of applications that are part of the DeFi ecosystem. Open and decentralized borrowing and lending have many advantages over the traditional credit system. These include the instant settlement of transactions, the ability to guarantee digital assets, the absence of checks before the credit agreement, and possible standardization in the future.

Money banking services

As DeFi apps are, by definition, financial apps, money banking is an obvious use case for them. These include, for example, the issuance of stablecoins, mortgages and insurance.
As the blockchain industry matures, the focus is on creating stablecoins. It is a type of crypto-asset that is usually associated with a real asset, but can be transferred with ease into the digital world. As the prices of cryptocurrencies can fluctuate quickly at times, decentralized stablecoins can be adopted for everyday use as they are digital cash not issued or controlled by a central authority.

Decentralized marketplaces

Several of the most important applications of DeFi are decentralized exchanges (DEX). These platforms allow users to trade digital assets without having to rely on a trusted intermediary (the exchange) to hold their funds. The trades are carried out directly between the portfolios of the users using smart contracts.
Since they require much less maintenance work, decentralized exchanges generally have lower transaction fees than centralized exchanges.

What are the challenges facing DeFi?

• Poor performance: Blockchains are inherently slower than their centralized counterparts, which also applies to applications built on them. Developers of DeFi applications should be aware of these limitations and optimize their products accordingly.
• High risk of user error: DeFi applications transfer responsibility from intermediaries to the user. This can be a negative aspect for many of us. Designing products that minimize the risk of user error is a particularly difficult challenge when products are deployed on immutable blockchains.
• Poor user experience: Currently, using DeFi apps requires extra effort from the user. For DeFi applications to become a key part of the global financial system, they must provide a tangible benefit that prompts users to switch from the traditional system to another.
• Cluttered Ecosystem: Finding the best app for a specific use case can be a daunting task, and users should be given the flexibility to find the best options. The challenge is not only to create the apps, but also to think about their place in the DeFi ecosystem as a whole.

Conclusion

The magic of decentralized finance is that it is global by definition and can be used by anyone in the world with a smartphone, even by the 1.7 billion people without a bank account. DeFi apps are powered by open-source code that can be verified by anyone.

Compare that to the highly centralized, opaque, profit-seeking financial system we live in and you will see why this vision fascinates the crypto community!