DeFi is an abbreviation whose meaning is Decentralized Finance. It is an open system that includes various types of cryptocurrencies, smart contracts and applications that are called decentralized because they are made with distributed accounting technology, the same technology that cryptocurrencies are created with.
Thus, the solutions created in the blockchain (mostly that of Ethereum, the most popular for this use) can be integrated, combined and modified according to each financial need.
For example, currently one of the most widespread solutions are automated loans, which give returns to cryptocurrency users from all over the world.
Why does Decentralized Finance exist?
The world economy currently works as dictated by governments and central banks, so many people are affected by issues of inflation and lack of liquidity. Thus, the investment returns are drastically reduced, the fees that must be paid for using traditional financial solutions are high and the interests are increasingly higher, for example.
An alternative to the problems of the traditional financial system are cryptocurrencies, which give financial sovereignty to each person who decides to use them.
However, access to cryptocurrencies still depends on the traditional system, and this is where DeFi finds its place: it gives users a way to be in control of their money through solutions that are not in the hands of a central entity. In addition, they can be audited and anyone can build on them, since they are (mostly) open source.
With decentralized finance the goal is to build a more secure, profitable and efficient network. To achieve this, the collaborative work of the community is key, since the innovation process is much faster.
What is considered as DeFi?
Let's dive a little deeper into what DeFi Development is. In this category we can find open loans, stable cryptocurrencies (or stablecoins) and decentralized exchanges, among others.
Open loans work similarly to traditional products, but users deposit their money and earn much higher interest if someone else applies for a loan.
To provide higher levels of security and transparency than in the traditional system, open loans take advantage of distributed accounting technology and select lenders and distribute the interest generated on the loan automatically. Also, they execute specific actions in case of noncompliance of any of the parties.
Stable cryptocurrencies or stablecoins are very popular, as it is a type of cryptocurrency that protects its price from sudden decreases or increases. To achieve this, its value is anchored to that of traditional assets such as gold or a fiat currency such as the US dollar, for example. Also, there are stable cryptocurrencies that determine their price according to an algorithm.
An example of the real applications of decentralized finance is this Cryptocurrency DeFi Wallet Development that integrates stablecoins among its asset portfolio, and has also announced that it is working on an open loan system for its users.
Decentralized Exchanges (DEX)
Decentralized exchanges (DEX) are those that do not depend on an intermediary for their users to carry out purchase and sale operations of various types of cryptocurrencies. They do not require identity verification as in traditional cryptocurrency exchanges and security is guaranteed through programs called "smart contracts".
With decentralized finance, users can obtain benefits that they do not find in the traditional financial system, since anyone can store, trade or invest, without having to submit a series of documentation that serves to verify their credit history. Similarly, there is no institutional intermediary that keeps a substantial part of the return of an investment.
However, the popularity of DeFi in 2020 is reminiscent of that of ICOs in 2017, so the lesson learned in those years is the same: before using a tool that manages our money in some way, It is convenient that we carry out a previous investigation to verify that it is not a scam. Checkout more Decentralized Finance (defi) Development Services Company