DeFi gets its name from the combination of the first two syllables of the words Decentralized (decentralized) and Finance (finance). As the name suggests, DeFi, a financial system that is not dependent on any authority or center, is built on blockchains open to users. The system is of great importance for the cryptocurrency markets as it has unlimited development and usage areas due to its open source code. In this way, it plays a critical role in establishing an independent financial ecosystem on the blockchain.
Systems where there is no decision-making authority or center, such as Bitcoin and Ethereum, can be shown as ideal examples for DeFi. We see that DeFi systems such as Bitcoin and Ethereum, whose usage areas are expanding day by day, are rapidly entering our lives.
For example, when you buy clothes from a store and pay with your credit card, there is a financial institution between you and the store. This “institution” is usually a bank that controls the transaction, holds any information about the transaction and has the authority to record it in its private ledger.
With Bitcoin, these institutions are kept out of the picture. Bitcoin and many other digital assets offer a different vision from legacy digital payment methods like Visa and PayPal, as they exclude all intermediaries from transactions. DeFi systems aim to exclude factors that negatively affect our lives, such as high transaction commissions and slow transaction speed brought by old digital payment channels from the system.
What are DeFi Usage Areas?
Of course, in today’s world, we need more financial instruments than sending or receiving money or making payments. For this reason, when talking about DeFi systems, we should not forget the tools that offer more advanced financial functions. These include more complex financial structures such as the decentralized stock market, shopping, marketplace, lending, and insurance.
In order to meet today’s developing technology and the “needs” it brings, we need an infrastructure that can produce faster solutions. DeFi meets this need by providing us with easy access to all kinds of financial instruments, as well as having the potential to create new financial markets, services and products thanks to interoperable applications on the blockchain.
We can give an example of decentralized exchanges as one of the most important DeFi applications. In this system, users can buy and sell digital assets without the need for intermediaries that secure their funds. These buying and selling transactions are carried out between the wallets owned by the users, with the help of smart contracts. Decentralized exchanges also create a different investment window for us as they allow us to trade with much lower fees compared to centralized exchanges due to their lower maintenance costs.
Smart contracts are used in most of the current or potential applications of Decentralized Finance. In a traditional contract, the relationship between the parties to the contract is determined through a legal terminology, while in smart contracts computer codes are used for this.
Since the conditions that make up smart contracts are written in computer codes, it still uses unique computer codes to check whether the conditions are met. In this way, many business processes that are still controlled manually are automated and presented more reliably. As a result, smart contracts provide higher speed and convenience in transactions, while minimizing risks for both parties to the contract.
To summarize, Decentralized Finance (DeFi) is a global financial system based on open source technology, developed as an alternative to existing financial structures. In this system, your money is not held by some institutions or companies. You hold your money. Instead of relying on some institutions or companies to use your money properly, you decide where and how to spend your money. Instead of waiting days for manual transactions, you can make your transfers in seconds. While you need to apply to an institution in order to receive financial services in traditional ways, anyone can get any financial service they want without any conditions in decentralized finance platforms.
In addition, DeFi, which is a completely digital system, allows you to trade 24 hours a day, 7 days a week, instead of the traditional markets that serve within certain hours. In decentralized finance, which acts on the principle of transparency, everyone can access the data of a product or service and examine how the system works, while financial institutions keep transaction records and all kinds of information in closed books and do not share this information with anyone.
It seems that we will talk about DeFi systems more in near future because of its functions such as transparency, security, meeting the needs of the developing world, and high transaction speed.