Decentralized finance, also known as DeFi, has gained enormous popularity since 2020, with the emergence of prominent DeFi cryptocurrencies like Alpha, Uni, and KLC, to name a few. While many people may have heard of these types of coins, they don't fully understand what they actually are. Therefore, this article aims to shed light on the basics of the DeFi trend and guide investors to make more informed decisions.
First and foremost, it's important to understand what decentralized finance means. In general terms, finance refers to the process of managing money, from those who possess it to those who need it. Traditionally, this process has been controlled by intermediaries such as banks and funds, acting as centralized authorities within society. This is known as Centralized Finance (CeFi).
However, with the development of blockchain technology, which is at the core of cryptocurrencies like Bitcoin, it is now possible to operate in the financial system without the intervention of these intermediaries. This system is known as Decentralized Finance (DeFi). In DeFi, markets are always open, and there are no centralized authorities that can block payments or deny access to financial services. Services that were once slow and prone to human errors are now automatic and more secure, as they are executed through smart contracts, which are Ethereum accounts that hold and send funds according to pre-established conditions. These smart contracts are immutable and execute as programmed, without anyone being able to alter them while active.
The main advantage of DeFi compared to the traditional financial system is that it provides greater freedom and control over assets and transactions. Here are some key benefits of DeFi:
You have control over your money:
In DeFi, you own your assets and decide how they are spent and where they go, without the need to rely on intermediaries to manage your money.
Fast transfers:
Transactions in DeFi are quick and efficient, taking only minutes compared to the days that traditional financial payments may require due to manual processes involved.
Privacy:
Transactions in DeFi are pseudonymous, meaning that financial activities are not directly linked to personal identity.
Open access:
DeFi is open to anyone who wishes to use financial services, without the need to apply for permissions or fulfill bureaucratic requirements.
Transparency:
DeFi is built on transparency, which means that anyone can view product data and analyze how the system works. This contrasts with traditional financial institutions, which often have closed records and do not provide access to their loan history or managed asset records.
Despite the numerous benefits of DeFi, there are challenges that need to be overcome for this system to achieve mass adoption. Some future challenges for DeFi include:
Complexity:
DeFi is based on a novel technology that requires basic knowledge of cryptocurrencies for its use. This complexity can hinder a large number of users from adopting DeFi due to a lack of convenience.
Software risk:
Since DeFi is still in its early stages of development, there are risks associated with the software used. Errors in the code can cause system failures, raising questions about who is responsible for such incidents.
Manipulation risk:
Because DeFi is not controlled by any government or organization, all transactions are borderless. This poses challenges in terms of regulation and accountability in cases of financial crimes that occur through DeFi protocols and applications.
These are just some of the questions and challenges that need to be addressed before DeFi becomes a conventional system used by the masses. Nevertheless, the future of DeFi looks promising as new coins and projects based on this technology continue to emerge and address existing issues.
In conclusion, decentralized finance (DeFi) represents a new way of operating in the financial system, eliminating the need for intermediaries and providing users with greater control and efficiency. While DeFi presents significant benefits, it also faces challenges that need to be resolved to achieve widespread adoption and ensure its reliability for the public. As DeFi development and maturity progress, it is expected that this trend will further revolutionize the financial industry in the future.