DeFi, which is a short form of decentralized finance. It is a set of financial services that works without banks or traditional institutions. Unlike the classic financial system, decentralized finance relies on open computer protocols that are built on the blockchain. The goal is to allow anyone, anywhere in the world, to be able to use services such as lending, borrowing, saving, exchanging or investing money, and this without any intermediary.
This system aims to be transparent, open and accessible. All the rules are coded in different programs, we call them Smart contracts. These contracts execute automatically, without needing human intervention. This allows DeFi to function 24 hours a day, without taking a break, without central authority, with a level of security that is ensured by the blockchain. DeFi therefore transforms banking services that are complex into simple lines of code that are accessible through the internet.
How does DeFi work?
DeFi works according to three key elements: the blockchain, the Smart contracts, as well as digital assets such as cryptocurrencies. When a user wants to use a service, such as lending money, he does not need to fill out a form or contact a bank. He just needs to connect to a DeFi platform with his digital wallet, deposit cryptocurrencies, and choose the action he wishes to perform.
We can take the example of a loan. A person wishes to deposit cryptocurrencies on a DeFi protocol in order to lend them to other users. In exchange, this person will receive interest, which is often automatically calculated and paid by the system itself. On the other side, a person who wants to borrow can deposit a guarantee which is called “collateral” and then obtain a loan without needing to justify his personal situation or go through an advisor. These different operations are managed by Smart contracts, which will take care of the management and proper execution of each step, and this in an automatic way.
What is DeFi used for?
Decentralized finance aims to replace or improve many services that can be found in traditional banks. It allows you to deposit money and receive interest, but also to request a loan, exchange currencies, and invest in financial products. All of this is accessible with a simple phone or a computer, provided of course that you have a digital wallet and an internet connection.
DeFi can be particularly useful in different countries where access to the banking system is limited. It offers an alternative for people who do not have a bank account, but who still wish to grow their money, borrow or send funds to their families. This technology also attracts many investors in developed countries, because it offers returns that are often higher than banks, even if of course this comes with greater risks.
With the evolution of cryptocurrencies and technological innovations, DeFi keeps evolving. New platforms appear regularly, aiming to offer services that are always more varied.
Advantages and limitations of DeFi
| Advantages of DeFi | Limitations of DeFi |
| Accessible to all, without entry conditions | Technical complexity difficult for beginners |
| Works continuously, 24/7 | Volatility of returns and assets |
| Reduction of costs thanks to the absence of intermediaries | Lack of clear regulation, which increases the risk of fraud |
| Total transparency thanks to the blockchain | Possible loss of funds in case of poor management of private keys |
| Total control of funds by the user | Total dependence on the internet and on technology |