What is DeFi and Why it is so Important?

Chances are that almost everyone has heard the term DeFi before, especially those following the cryptocurrency market. However, maybe explaining what it is can be a bit trickier.

DeFi is an acronym for decentralized financial applications or, in other words, all those banking services and means of payments but without an intermediary or a person centralizing these services.

To make it easier to picture, imagine the case of a loan. When you borrow some money from the bank, you are basically using that institution to give you access to someone else's money, and, of course, you pay an interest rate for it (a fee that can vary a lot depending on the bank).

Now imagine if there was no bank in that equation. The percentage charged by the bank for that "intermediation" would not exist, and you would consequently be able to pay much cheaper for a loan, and the person who is lending you would still receive more, so all sides win.

DeFi protocols make all this possible using Blockchain technology (mainly from Ethereum), so it is worth looking at some of the main opportunities that arise from using DeFi and also understanding the process behind them a bit further.

These decentralized applications must be open source and operate autonomously, with no particular authority in control. Changes are only made after a consensus is reached among the participants. Protocols and information are stored on the blockchain, protected by encryption, and accessible to the decentralized network.

Tokens are issued, a kind of virtual card with an assigned value, to allow access to the network and also to reward users. Tokens are generated through an algorithm that encourages the contribution of network members.

Beyond Loans

DeFi also has to do loans, that is true – in fact, DeFi loan platforms are the best known among the entire market. There are more than 4 billion dollars in Value Locked (assets frozen to carry out DeFi operations) only on these platforms, corresponding to almost 50% of the entire market, but there are many other applications.

Trading Without an Exchange

Imagine, for example, that you do not have to pay trading fees to brokers (such as Binance) and do not have the custody risk of them (because you would have ownership of your assets) – this is another possibility that DeFi created from Dexes.

This possibility made several platforms for this purpose very successful this year, so that it became the second-largest category among DeFi these days.

Perhaps the two main platforms that you should know about are Curve Finance and Uniswap. The latter, in fact, has already exceeded the daily volume traded on Coinbase Pro and has been one of the main portals for the listing of new tokens and protocols, being one of the favorite tools of DeFi users.

Payment Without an Intermediary

The third main application within the DeFi universe is the development of means of payment without intermediaries.

This is nothing new for the cryptocurrency community, given that today's main asset (Bitcoin) does just that. Still, it is interesting to realize just how these applications are even solving the Bitcoin problem.

As strange as it may seem, Bitcoin has a scalability and speed problem in its transactions.

What is happening is that synthetic BTC-backed tokens are being created in which people can trade without using the BTC Blockchain, enabling the transaction in Blockchains faster and cheaper and managing to make BTC an even better payment method. In fact, 0.5% of all existing Bitcoins are locked in DeFi on Ethereum's Blockchain, such as renBTC and WBTC.

A New Financial Market

DeFi opens the door to a new dynamic financial market, which is more decentralized, with fewer intermediaries, and can be very profitable for its users and may have a major impact on the entire market soon.

But beware of the hype that many people have with these assets; despite being revolutionary, these are still in an early stage of development.

Today, you can find multiple decentralized applications presently in trading, offering access to a vast range of functionalities per the available options.

Undoubtedly, the Decentralized financial ecosystem is still relatively new; its progress is undeniable. However, there are still some gaps to bridge. This innovation is gradually approaching a point whereby it becomes a daily use case, similar to traditional bank cards and fiat currencies.