Web3 brings numerous opportunities and new concepts. One of them is DeFi, an abbreviation of Decentralized Finance that refers to peer-to-peer financial services that take place on public blockchains, such as Ethereum. DeFi is an umbrella term for financial applications existing in the blockchain space. In this guide, you will learn about Defi platforms and be able to make your opinion on whether they can threaten traditional financial institutions.
What is Decentralized Finance?
DeFi refers to the next generation of digital financial systems. It provides an interconnected financial system that removes a middleman. DeFi protocols process financial transactions without the involvement of the bank or other financial institutions that would usually process transactions and cut commissions from money transfers and other operations.
In DeFi, technology takes the place of an intermediary. It not only cuts down the costs but also the velocity of the process is improved, and other tangible benefits are brought to the table. In this short, 60 second video, you will learn key information about decentralized finance:
The Benefits of DeFi
As with all innovation, DeFi promises to improve the current state of matters. The benefits of DeFi, as compared to a centralized financial system, are the following:
- Independence – since no intermediary is involved in DeFi transactions, one can readily transact without centralized financial institutions such as banks. It also means that you don’t need to go through the complex data verification process and multiple procedures that slow down the entire process.
- Flexibility – you can access DeFi from anywhere in the world, 24/7, and your operation is not dependent on external parties’ permissions. Also, it’s easy to join DeFi, you don’t need to set up a new account and go through the entire verification procedure. Instead, you are required to connect your crypto wallet, and you can start operating with your digital assets.
- Transparency – DeFi, at least in theory, is fully transparent. Smart contracts code and transactions are publicly available and accessible to an external observer. That component differentiates DeFi from centralized finance, where data is scattered across databases and often inaccessible.
The Disadvantages of DeFi
DeFi is not always ideal. While traditional financial systems often use well-tested solutions, DeFi’s innovative proposition has obstacles that may limit its adoption. Some of the disadvantages are:
- Usability – while DeFi brings multiple opportunities, the complexity of DeFi systems makes it challenging to handle and may discourage some, especially new users.
- Fees and Volatility – DeFi transactions come with costs. Due to the crypto market volatility, those fees may be subject to high variance.
- Scalability – the performance of the DeFi system and its ability to scale are questionable, which is an essential issue in the development of the entire system.
- Subject to Frauds – institutions acting in traditional finance usually offer high-security standards. DeFi is at an early stage of its development, therefore, may be susceptible to cyberattacks.
Your Questions Related to DeFi Answered
To better grasp decentralized finances, find answers to frequently asked questions below:
Are DeFi and Cryptocurrency the Same Thing?
No, they are not. DeFi (decentralized finance) and cryptocurrencies are concepts related to Web3, encompassing various projects and conceptions.
However, DeFi and Cryptocurrency are strongly related to each other. Crypto assets are a means of exchange in decentralized finance and are an underlying component of DeFi.
What is an Example of DeFi?
Coinbase, Jeeves Blockchain, Stobox Technologies Inc., and Cion Digital are examples of DeFi companies.
Uniswap is one of the few decentralized exchanges that allow users to purchase and sell cryptocurrencies. At the end of November 2022, Uniswap recorded 120M+ all-time trades, 300+ integrations of DeFi apps, $1,2T+ trading volume, and 4,400+ community delegates. As you can read on their official website:
The Uniswap Protocol is an open-source protocol for providing liquidity and trading ERC20 tokens on Ethereum. It eliminates trusted intermediaries and unnecessary forms of rent extraction, allowing for safe, accessible, and efficient exchange activity. The protocol is non-upgradable and designed to be censorship resistant.source: Uniswap.com
What is a DeFi company?
A DeFi company is a firm that operates in the decentralized finance industry and builds solutions in blockchain technology.
According to blockdata.tech, some DeFi companies are Celsius Network, Copper, Blockdaemon, Celer Network, XDC Network, Kyber Network, YOP, Bit2Me, Aave, Qredo, Pankakeswap, InsurAce, and Cobo.
What is a DeFi wallet?
Some Defi protocols may require crypto wallets, also known as non-custodial DeFi wallets.
A DeFi wallet stores your cryptocurrency. As a result, no centralized institutions, such as governments or banks, can access your account and freeze your available funds.
DeFi wallets also vary from those wallets issued by centralized exchanges that control your assets. With DeFi wallets, an owner of the seed phrase or private key (the equivalent of a password) is the only entity that can access your funds.
Is Decentralized Finance a Real Chance or Another Buzzword? A Brief Summary
With the growing popularity of Web3 and complementary concepts associated with capital and financial services, it’s easy to encounter worthless buzzwords. However, DeFi seems not to be just another fancy term. Decentralized finance may change much, even though its adoption is still limited.
Decentralized finance may seem easy to start with. It takes a stable Internet connection to access decentralized exchange and varied DeFi applications. In contrast to traditional financial products, you don’t have to provide extensive documentation to set up a new account.
On the other hand, DeFi is still in the early stage of development, and multiple constraints may hamper its growth and adoption. For example, new users may be reluctant to perform complex financial transactions, while the UX/UI of DeFi solutions still have vast room for development.
Financial technology for sure brings many benefits as compared to centralized finance. It’s worth observing its development; however, be wary of the risks of modern DeFi protocols and carefully discover the benefits of decentralized apps and solutions.