DEFI decentralized finance, what is it and how it works

DEFI decentralized finance what is it and how it works

Defi decentralized finance is the term used in recent years to indicate a financial system that has no intermediaries.

With the advent of cryptocurrencies like Bitcoin, Ethereum, etc., we entered a new financial era different from the previous one.

This is because traditional finance is showing us its problems that can be devastating in the long run.

See for example the growth of inflation, which is increasing, making fiat currencies depreciate continuously.

Not only that, but the supply of traditional finance products are not very profitable compared to those related to cryptocurrencies.

An example is the cost of a bank account and a cost of a cryptocurrency wallet that is free.

These are just a few examples, but we can see how the Defi decentralized finance system is much more convenient than the traditional system.

What is Defi Decentralized Finance

First of all we understand what we are talking about.

As I wrote earlier, Defi means a decentralized system that does not need intermediaries to function.

For example let’s consider Bitcoin, to work it does not need a central body that controls it but a mathematical system does everything, drawing it not editable and not controllable, all thanks to the Blockchain.

If a person would like to make a transaction with Bitcoin, all they need to do is confirm everything on their wallet, and the rest will take care of the system, for example using a light network.

This example is the meaning of Defi decentralized finance.

We can say that all products that use a Blockchain, smart contract, and have a decentralized system, can enter the Defi field.

But how can a Defi system be used in everyday life?

The use of Defi decentralized finance

We can use this system in many ways such as exchanging value between two or more subjects without intermediaries, using the Bitcoin point.

This is a practical case, but there are many more like Dai the Maker Dao stablecoin.

Dai is an example of Defi that uses an Ethereum stake on Maker, to be able to generate The token anchored to the dollar, that is we are going to lend Ethereum using Maker to receive Dai.

This is a Lending system, ie using an asset to generate something thanks to the blockchain and smart contract.

The case of Lending is an example of using this system to generate an interest in lending a token using cryptocurrencies.

Furthermore, there is a considerable low cost and speed in transactions compared to the traditional system.

But also Bancor, the decentralized cryptocurrency exchange that relies on Ethereum and within it can be exchanged for assets as happens for example on Binance.

Obviously this sector is underdeveloped, but certainly in the future there will be considerable development precisely because of its many points in its favor.

Possiamo utilizzare questo sistema in molti modi come ad esempio scambiare valore tra due o più soggetti senza intermediari, utilizzando al punto Bitcoin.

Data from the Defi sector

As I said before, this sector is still underdeveloped precisely because it is still little known and, in fact, used.

If we go to the Defi review site, we see some very interesting data related precisely to this sector

Data from the Defi sector

As we can see from the image above, the volumes are very low comparable to traditional finance.

We can say that they are really poor, that is, we are talking about small change compared to the Trillions of dollars of the system that we all know.

Especially if we move to the third position, the gap is considerable.

This is because, as I said before, it is still very underdeveloped.

Going to see the pie chart, we will note that most services use Lending, that is the system that uses traditional but more functional finance.

That is all the services related to the loan, investment and exchange that use cryptocurrencies as an asset.

Furthermore, if we consider the second image, we can see that almost all projects are related to the Ethereum blockchain.

ranks leading companies in Defi

this is because the sector must be stable and Ethereum is the first smart contract platform and it is the most stable currently, and it is also the one with more development behind it.

We can also note the Bitcoin light network which occupies 10th place.

Conclusion

Even though young, Defi finance decentralized, is proving to have the data to overcome traditional finance.

This is because, to date, every person needs services that are increasingly in step with the times, and having excessive costs using obsolete services, has consequences.

Thanks to the introduction of Bitcoin, there has been a change of direction, which will lead to an improvement in the financial system, making it more efficient.

We just have to wait and continue to improve this sector in order to take advantage of a better system with time.

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