Everything You Should Know About Decentralized Finance

 

Blockchain and cryptocurrency-focused Decentralized Finance system that gives people around the world access to new financial opportunities is on our blog post.

 

Table of Contents

 

The Development of DeFi

Why DeFi (Decentralized Finance)?

What are the Advantages of DeFi?

What Are the Disadvantages of DeFi?

Is it completely safe to invest in Decentralized Finance (DeFi)?

When will Decentralized Finance (DeFi) become widespread?

 

“DeFi”, which is an abbreviation of the words decentralized and finance, is the name given to the financial system built on Blockchain networks, which, as the name suggests, is not connected to any center and does not need any authority. Decentralized finance is emerging as a rapidly growing alternative to the traditional financial system. Blockchain and cryptocurrency-focused decentralized finance offer people around the world access to new financial opportunities. If we consider the concept of “Decentralized Finance” in more detail; we can call it an ecosystem that is open to everyone, open-source, not based on permission, not managed by an authority, and built on the principle of transparency.

 

The Development of DeFi

 

It would be more accurate to define DeFi as a concept rather than a project. With the popularization of MakerDAO (Decentralized Autonomous Organization) in early 2018, it is an emerging system. This concept, which was first called by different names, then took the name "DeFi" with the coming together of companies working on the decentralized Blockchain system. It was translated into Turkish as "Centralized Finance".

 

Compared to traditional finance, DeFi increases the potential for returns by eliminating middlemen. In addition, people who have difficulties in accessing traditional financial services can easily benefit from these services through decentralized finance. Decentralized finance is highly autonomous, censorship-resistant, and accessible to anyone with an internet connection. It is also transparent and can give you demonstrable ownership of your assets, in other words, the chance to “become your own bank”.

 

Why DeFi (Decentralized Finance)?

 

Cryptocurrencies emerged in response to traditional finance to give control of money back to its owner. However, the only purpose of DeFi is not to offer freedom to its users, but also to provide service to every user who cannot access the traditional financial system and has difficulty in accessing it. Some people may think of the question of whether there is still a user who cannot access the banking system. However, 1.7 billion people in the world are defined as unbanked, that is, they cannot reach the traditional banking system and the traditional system does not try to solve this problem. For this reason, DeFi stands out not only for its decentralization but also for its desire to reach everyone.

 

What are the Advantages of DeFi?

 

• Goodbye to human error and mismanagement: We have already mentioned that financial crises occur due to the mismanagement of central banks and third-party intermediaries (TPIs). But thanks to smart contracts, human errors are pushed out of the process if the codes are not written wrong.

 

• Quick and permanent access: In the traditional financial system, if you need to get a loan, you have to go to the bank, and sometimes it can take a very long time to get a loan. But with DeFi, you can withdraw a loan with one click, even in the middle of the night. As long as you have an internet connection, you can access the protocols from anywhere and anytime.

 

• A healthier system: Covid-19 has shown that traditional financial systems (CeFi) are very vulnerable to global shocks. This is because centralized financial systems rely on physical contact between individuals. COVID-19 caused an economic shock three times worse than the 2008 financial crisis. According to economist Nariman Behravesh, this loss can be minimized with decentralized finance (DeFi).

 

• Unauthorized transactions: In the traditional financial system, you need permission from an intermediary to execute almost any financial transaction. Even to withdraw a lira from your account, you have to wait for bank approval, while DeFi users can carry out their financial transactions without having to ask permission from anyone.

 

What Are the Disadvantages of DeFi?

 

With the developing technology, the interest in systems that offer financial solutions such as DeFi is increasing day by day. However, according to research, the number of cryptocurrency users is currently limited to 68 million as of February 4. Considering the 1.7 billion “unbanked” users we mentioned at the beginning of the article, the path to be taken by the crypto community is still considerable.

 

crcrOn the other hand, with decentralized finance, some problems are also increasing. At the beginning of these problems; Countries and many users do not like situations such as illegally obtained money, illegal trade with cryptocurrencies, money laundering. Such problems pose a serious threat to countries, and therefore some countries are working to issue their own digital currencies. Of course, issuing their own digital currencies contradicts the concept of decentralized finance, because in this case, it is also subject to authority. For this reason, it seems that countries' opposition to DeFi applications will not be very meaningful in the future.

 

Is it completely safe to invest in Decentralized Finance (DeFi)?

 

We will answer no to this question. Because currently, DeFi protocols are quite risky. Those who invest in decentralized finance (DeFi) protocols believe that they will get big returns for the big risks they take. On the other hand, a new DeFi protocol is being developed every day and it is very difficult to distinguish good projects from bad ones.

 

In 2020, when the popularity of DeFi platforms increased significantly, many DeFi protocols such as YAM collapsed and the market capitalization decreased from $ 60 million to 0 in just minutes. Other DeFi projects such as Hotdog and Pizza faced the same fate, with many investors losing huge amounts of money. If you want to invest in DeFi protocols, we recommend that you examine the projects in detail. We recommend that you read the audit reports to see if the protocols have been tested and if they have been audited.

 

When will Decentralized Finance (DeFi) become widespread?

 

More and more people are getting acquainted with decentralized finance (DeFi). Many decentralized finance protocols are likely to shape the financial world in the future. So much so that some DeFi projects are seen as the Robinhood of people who lack traditional banking services. However, this new financial technology is still more experimental and there are very serious concerns about scalability and security. Developers continue to work to solve these problems. Especially with Ethereum 2.0, scalability issues are expected to be largely resolved.

 

We hope that this blog post will be beneficial for you. We will continue to create useful works in order to get inspired by everyone. We are sure that we will achieve splendid things altogether. Keep on following Finage for the best and more.  

 

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