What is Decentralized Finance (DeFi)?

Decentralized Finance or DeFi is a new monetary system built on a public blockchain. The components of open finance consist of protocols, digital assets, DApps, and smart contracts built on the blockchain. While many of us know Ethereum and Bitcoin as cryptocurrencies, few know that it is an open-source, vast network that allows users to develop apps that can engage centralized institutions through their financial activities. There is not. In fact, decentralized finance Ethereum is one of the names that helped bring the essence of open finance to the mainstream.

The intention of introducing this new system is simple. First, it is helping 1.7 billion people without access to basic financial services. Second, the introduction of open banking through decentralization-the inclusion of decentralized financial technology means that there is no point of failure for the same record kept on multiple computers over a P2P network. And since it is unauthorized, it is accessible and open to everyone.

Key Features of Decentralized Finance

1. Decentralization-  The code, one of the most important aspects of the crypto space, is not written by the staff of the institution with the agency that manages it. Instead, the code is written through smart contracts and distributed on the blockchain. Anyone can write these smart contracts and no one has complete decentralization control.

2.Transparent- The blockchain system allows users to build strong trust relationships on the platform. The transparency of the code on the blockchain makes it possible for everyone to see and appreciate it. Now you may be wondering if all transactions are transparent. So isn't your privacy at risk? All transactions are transparent, but the user's identity is anonymously using the code.

3. Global-  Perhaps one of the system's most exciting features allows everyone to access the same DeFi service wherever they are. Technically speaking, anyone with Internet access can get a variety of financial services. With DeFi, anyone with an online connection and a Smartphone can access financial services. Due to the unauthorized nature, users have no geographical restrictions, so even if you block the IP address, users can still access the network remotely via a VPN. In contrast, most traditional financial service's limitations are geography. In addition to geographic restrictions, traditional financial services favor a wealthy population. Customers with more assets generally enjoy better rates and have access to wealth management tools. DeFi minimizes inequality and allows users to enjoy similar services of any size.

4. Without- Permission Another important feature of the DeFi platform is that everyone can engage, create, and use DeFi apps. Users don't need to interact with financial institutions; instead, they can interact directly with smart contracts in their smart wallets.

5. Flexible- This is one of the reasons more and more people are starting to use DeFi services. If users don't like the DApps interface, they can easily use other interfaces or build their own. This allows users to select and change the DeFi service that best suits their needs.

6. Interoperability-  It is a feature of the DeFi platform that allows you to build applications by combining different DeFi products. So, you can combine different applications or products to create something entirely new.

How does DeFi work?

Certain blockchains such as Ethereum support smart contracts. Smart contracts are programs (lines of code) that run on the blockchain and execute certain functions when given conditions are met. By combining these smart contracts, blockchain engineers can create decentralized applications (DApps).

These DApps form the backbone of DeFi. Programmers can set up DApps to do any role. There are already DApps that support lossless savings games and personal-to-person loans without the need for borrowers and borrowers to know and trust each other without third party interference. In this regard, the possibilities are endless.

Advantages of Decentralized Finance (DeFi)

Decentralized Finance Development Company (DeFi) is built on top of the blockchain. Often the blockchain is referred to as the general infrastructure layer. As a result, DeFi can be viewed as a cluster of second-tier applications. This allows DeFi to internalize the core properties of decentralization. It is important to note that this only persists if the blockchain itself is decentralized. Meeting this prerequisite will share the core benefits of financial openness with the core benefits of blockchain.

1. True decentralization is censorship resistance, can participate globally, regardless of social status, and excludes trusted third parties.

2. Using blockchain as a technology infrastructure enables relatively fast and inexpensive transactions/payments, the immutability of financial contracts, and contract automation.

3. DeFi applications usually allow users to continue to own their private keys. This is called non-custodial in the blockchain ecosystem. Users have full control over their money without a trusted third party.

4. Since no symmetric information exists and individual interests are managed by a transparent protocol, ecosystem transparency is increased, so the pricing and market efficiency minimizes the minimum agent risk.

5. DeFi prefers network effects because it uniquely combines different projects in Layer 2 or Layer 3 applications, resulting in a lot of innovation.

What role do Smart Contracts have in DeFi?

Most of the prevailing and potential applications of decentralized finance include the creation and execution of smart contracts. Common contracts use legal terminology to specify the terms of the relationship between the entities entering into the contract, whereas smart contracts use computer code. Since the terms are written in computer code, smart contracts also have the unique ability to enforce their terms through computer code. This makes it possible to reliably run and automate numerous business processes that currently require manual oversight. Using smart contracts is faster and easier and reduces the risk for both parties. On the other hand, smart contracts also introduce new types of risk. There are bugs and vulnerabilities in computer code, so the value and confidential information locked in smart contracts are at risk.