What Is DeFi in the Crypto Market?

DeFi stands for «Decentralized Finance» and refers to a set of financial services offered on public blockchains, especially Ethereum. With DeFi, you can do many of the things traditionally offered by banks, such as earning interest, borrowing, lending, buying insurance, and trading assets and derivatives without the need for financial intermediaries.

Like cryptocurrencies, DeFi is global and peer-to-peer, and it is accessible to everyone. In this system, users can interact with each other directly and don't have to rely on a centralized entity for financial services.

What Is DeFi and How Does It Work?

DeFi is a general term for decentralized financial services built on public blockchains, most of which currently run on the Ethereum network. In DeFi, many traditional financial services are carried out without the need for a bank or a third party.

Unlike the traditional banking system, using DeFi services doesn't require opening an account or filling out various forms. Users usually interact with DeFi services through software called DApps, or «decentralized applications».

Why Does DeFi Matter?

DeFi extends Bitcoin's core idea of creating digital money and aims to offer a range of financial services without depending on traditional structures and centralized intermediaries.

This model can pave the way for more open and accessible financial markets, so that anyone with an internet connection can access decentralized financial services.

What Are the Advantages of DeFi?

DeFi has features that set it apart from traditional financial services. The main advantages of decentralized finance are:

• Open access: To use DeFi, you don't need to apply, get your account verified or open a bank account; you can access these services simply by creating a wallet.
• Pseudonymity: To use many DeFi services, you don't have to provide your name, email address or other personal information.
• Flexibility: Users can move their assets anytime and anywhere, without needing permission or waiting for lengthy transfers.
• High speed: Interest rates and rewards in some DeFi services can update very quickly, in some cases even changing every 15 seconds.
• Transparency: Transactions made on the blockchain are visible to participants, creating a level of transparency that many private companies lack.

What Are the Uses of DeFi?

Today, users use DeFi for a wide range of financial activities. The main uses of DeFi are:

Lending in DeFi

Users can lend their cryptocurrencies to others and earn interest and rewards in return. This interest can be calculated and paid at shorter intervals than in the traditional banking system.

Borrowing in DeFi

DeFi makes it possible to borrow without the usual administrative processes and paperwork. One example of these services is Flash Loans, which are extremely short-term and have no equivalent in the traditional financial system.

Peer-to-peer trading

In DeFi, some digital assets can be traded peer-to-peer; that is, buying and selling happens directly between the parties, with no need for a centralized broker to execute the trade.

Earning yield on digital assets

Users can put part of their cryptocurrencies into alternatives to savings accounts and earn interest this way. In some cases, this interest rate can be higher than typical bank account rates.

Trading derivatives in DeFi

DeFi also allows trading of some derivative products. Users can take positions on the rise or fall of an asset's price, that is, Long or Shortpositions. These tools can be seen as a crypto version of options or futures contracts in traditional markets.

What Are the Disadvantages and Risks of DeFi?

Alongside its advantages, DeFi also comes with limitations and risks that users should consider before using its services.

• Variable transaction costs: Transaction fees on the Ethereum network can change, and when network activity increases, frequent trading can become costly.
• High capital volatility: Depending on which DApps you use and how you use them, your investment may be highly volatile. DeFi is still a relatively new technology.
• Responsibility for tax records: Users need to keep records of their activity for tax purposes, as tax laws and regulations can vary from one region to another.