Decentralized Finance (DeFi) is the financial applications ecosystem built on blockchain networks. It aims to create a financial ecosystem that does not have a central authority, is open source, not based on any permission, and in which the transparency is at the forefront.
Users interact through peer-to-peer (P2P) and DApps (decentralized applications), keeping control of their entire assets.
One of the most important advantages of DeFi is the easy access to financial services. This feature is extremely important for people who do not have access to the financial system in the current environment. Another prominent feature of DeFi is its modular infrastructure. DeFi applications that can work integratedly on the blockchain generally have the potential to create new financial markets, services and products.
Decentralized Finance (DeFi) and Its Advantages
When we look at the working principle of the traditional financial system, it is based on the function of banks as intermediaries. DeFi applications work without the need of any intermediary. Controls of codes and user funds that predetermine the solution of any dispute are always at hand in DeFi system. Thanks to these practical solutions, costs are reduced depending on the use of the services and it creates a financial system with fewer problems.
Since innovative financial systems are built on the blockchain, mistakes are eliminated. The data is recorded on the blockchain and distributed by many nodes. In this way, it becomes impossible to disable the services. Since frameworks for decentralized finance applications can be set up in advance, it is safer and simpler to include one of these frameworks in the application.
Another advantage of this easy-to-access system is that it provides access to people who cannot access any financial services. When we look at traditional financial systems, we see that they are based on profit making. For this reason, it is very rare to find services in regions where communities belonging to lower income live. DeFi, on the other hand, provides a wide range of financial services to low-income communities by drastically reducing costs.
The Uses of DeFi
Credit System on Borrowing and Lending
Open lending protocols, one of the most popular application types of DeFi, are based on decentralized and open borrowing and lending. This application, which has many advantages compared to traditional credit system, has advantageous aspects such as instant transaction termination, securing digital assets, potential standardization and lack of credit control.
Since borrowing services are built on open blockchains, they minimize the need for trust and benefit from cryptographic authentication methods. Because they are on the blockchain, borrowing and lending processes become cheaper and faster.
Monetary banking services
Since DeFi applications are based on financial applications, monetary banking services are among the areas of use for DeFi. Launching of stablecoins, insurance and mortgage are some of the examples.
As the blockchain industry continues to evolve, interest in the production of stablecoin increases. Stablecoin is the name given to the type of crypto asset that is generally fixed in value to another asset and easily transferred digitally.
The mortgage loan process is often time consuming and expensive due to the large number of intermediaries that need to be involved. With the help of smart contracts, legal transaction costs and the number of intermediaries are greatly reduced.
Insurance on the blockchain eliminates the need for intermediaries. This makes it possible to share the risk among many participants. This provides return as low premiums in exchange for equal service.
One of the most important among DeFi applications is undoubtedly decentralized exchanges. Decentralized exchanges allow users to keep their funds safe and trade digital assets without the need for a third intermediary. Trading transactions are made directly between user wallets with the help of smart contracts. Decentralized exchanges have lower transaction fees as they require less maintenance than central exchanges.
What are the differences between DeFi and Open Banking?
Open banking is the name given to the traditional banking system, where third party financial service providers are allowed to securely access financial data through APIs. With this system, data and accounts can be integrated between banks and non-bank financial institutions. On the basis of the system, new services and products can be created in the traditional financial system. Despite the open banking system, DeFi serves as a new financial system, regardless of the existing infrastructure. DeFi can also be called open finance.