DeFi is one of the most used words in today’s world. But what is it anyway?
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It turns out, DeFi, an abbreviation for “decentralized finance”. There is a set of special services that use smart contracts and decentralized applications for the purpose of the service. Directly due to the use of such technologies, the formation of an independent economic ecosystem is made possible, which is not subject to the influence of external regulators, and also reduces the human condition in one’s own work to a minimum.
To put it more trivially, together with the support of DeFi, capital will become easily accessible to absolutely everyone: users perform transactions and solve economic problems directly with each other, and not through intermediaries in the form of banks, courts, brokerage institutions, and so on. The decentralized ecosystem software enables buyers, sellers, clients, lenders and borrowers to interact.
Comparing DeFi to Traditional Centralized Financial Systems (CeFi)
|Who issues money||Government/central banks||Miners generate new coins (tokens).|
Which are then put into circulation and
used by the entire community.
|What counts as money||State currencies||Cryptocurrencies and tokens|
|Who is responsible for lending||Banks||Decentralized platforms that are|
controlled by the community
|Who is exchanging assets||Exchanges and brokers||Decentralized exchanges that do not store|
user data and do not require
you to show your documents
|What to invest in||In stocks, bonds and other instruments|
with the help of banks and exchanges
The difference between centralized (CeFi) and decentralized financial systems lies in how their users achieve their goals. At CeFi, users rely on the people behind the business and on the regulatory framework. In the case of DeFi, users rely entirely on technology, code, and encryption algorithms.
Legal Aspects of DeFi
DeFi is a decentralized blockchain system that communicates with each other using smart contracts built solely on mathematical algorithms. All this becomes the reason why such decentralization causes the main problem – no one is responsible for the actions of participants within the system.
That is, participants must understand what they are getting into and fully take into account the risks that may arise. All the movement of funds and the conclusion of new smart contracts is an automatic process that cannot be influenced by a person from outside. Because of this, it is impossible to find persons who would be responsible for the preservation of financial assets.
How are DeFi applications created?
Anyone who is capable of writing smart contracts can create DeFi applications. There are several tools for testing and/or deploying smart contracts for Ethereum. After downloading the platform for creating smart contracts, you can create a token that allows the protocol to use the blockchain network. On Ethereum it is an ERC20 token, on Solana it is called SPL, and on Binance Smart Chain it is BEP20.
The presence of a token allows the protocol to interact directly with the blockchain coin. But projects have also promoted their tokens for decentralization. For example, the Compound lending protocol uses COMP as a governance token, meaning who owns this token can make decisions about the protocol code and the allocation of treasury funds.
How to use DeFi products?
Anyone can use DeFi products by going to the app’s website and connecting to a DeFi-enabled crypto wallet such as MetaMask on Ethereum or Phantom on Solana. Most DeFi DApps do not require users to provide any personal information or registration. However, since applications are built on the blockchain, you must use the coins of that blockchain to pay for transactions. ETH is required to pay for transactions on the Ethereum network, SOL is required on the Solana blockchain, and so on.