Get to know the world of decentralized finance or DeFi, a revolutionary ecosystem that is becoming increasingly important throughout the global financial world, and which has led to the creation of new financial paradigms, blockchain application and usability.

Las DeFi or Decentralized Finance (Decentralized Finance, in Spanish) is the name that is defining a great trend that is taking place around the tecnología blockchain in recent years.

DeFi seeks to develop small traditional financial pieces but with an extra degree of transparency and decentralization. These small pieces, as if they were Lego pieces, are combinable with each other, in order to develop an entire ecosystem of small solutions that together form a great solution for finances that invalidate the need for centralized and opaque financial financial institutions that they no longer add value.

That is the idea that has driven the creation of the term “DeFi”, and the one that has taken its evolution to the present point. In fact, it is impossible to ignore the towering impact DeFi has on the crypto world today. For that reason, we open a space to know what DeFi is and how this idea is changing the global financial world.

DeFi, the idea that is changing the financial world

Imagine a world where anyone could create transparent, fair and efficient financial products, making banks, big finance companies, lenders and insurance companies take a back seat, or better yet, become completely unnecessary and disappear. But also a world where anyone can interact with these products freely.

Well, this is what DeFi is. That is, it wants to convert the centralized finance structures that we have now, into decentralized structures, without trusted third parties, executed on smart contracts or smart contracts, within a blockchain where a written and unalterable record of each action carried out is transparently reflected.

The impact of a trend like this is gigantic. We are just in its early years and already the creativity of the global community is shaping alternative versions of almost all existing financial products.

Imagine that you have the need to obtain a loan to undertake. Instead of going to a bank, you can go to a DeFi platform and apply for a loan. Said loan has conditions (saving the technicalities) quite clear and transparent. All this thanks to the fact that said loan will be controlled by a Smart contract public and immutable.

Not only that, all the actions that are carried out on the platforms are visible and immutable also recorded on the blockchain. Perhaps you do not have the knowledge to verify the reliability of the DeFi service, but due to its transparency feature, thousands of eyes will be able to analyze and question it, warning of its malfunction if so. And in the future, given the impact of this technology, children will surely be taught at school to read transparent smart contracts.

Thanks to DeFi, you won't need to be banked, you won't need to carry dozens of papers, stand in lines to deliver them, and wait weeks for a response. Instead, from the comfort of your sofa, with your smartphone you can do the whole process with the money in your possession.

However, DeFi can be much more, they can be the vehicle for the economy and finances of that increasingly present world that with the help of Blockchain technology begins to decentralize. The vehicle that opens the doors to international investments without so much bureaucracy, costs and time and with higher levels of trust and transparency. A vehicle so that unbanked people can access services without the dictatorships of the banks, having the same conditions to evolve personally in their development.

Origin of DeFi

If you are one of those who think that DeFi originated with the birth of Bitcoin, you are right, Bitcoin it is definitely the world's first DeFi platform. But the origin of the idea is much older.

Nick Szabo He was pointing, perhaps unknowingly, to the birth of DeFi when he presented his idea of ​​smart contracts in 1995. That is 13 years before the creation of Bitcoin, an idea without a doubt ahead of its time. 

However, it was not until the arrival of Ethereum in 2014, which was a radical change to this idea. Ethereum and its smart contracts allowed developers to create anything they could imagine on a blockchain. And precisely that what started with an experiment is now becoming a movement by itself, in a decentralized financial ecosystem that operates billions of dollars every month. 

An ecosystem that during the years 2018 and 2019 maintained a constant development, and during the first months of 2020 it has had an unprecedented growth. It has even reached the point that it has revalued blockchain projects by allowing to create bridges between traditional finance and cryptocurrencies. 

Thanks to this work, we can now count on liquidity markets, loan systems and Decentralized exchanges (DEX), all this being just the beginning. 

DeFi Features

Now that we know the concept, its origins and the differences between digital financial models, let's know what the characteristics of DeFi are. 

  1. They work based on blockchain technology and smart contractss.
  2. They are very safe. This is thanks to the fact that they use powerful cryptographic techniques to ensure that the platform, access and use of them can be done only by authorized persons.
  3. They have high levels of decentralization. DeFi's greatest potential is its high level of decentralization. That is, they have the ability to act without the need for a bureaucratic chain to impose itself over the functions of the platform.
  4. No trust in third parties. This means that action on a platform is direct between the user and the platform itself. Trusted third parties are unnecessary because that task will be performed by the blockchain. It is this structure that will keep the record of everything in a secure and immutable way. 
  5. Transparent Another great feature of DeFi is its transparency. As they are built on free software, each line of code on the platforms is auditable. In addition, resource mobilizations are auditable, because they all take place on the blockchain. 
  6. Without Borders. Access to a DeFi platform is borderless. You can be in any country in the world and access its services without inconvenience.  

Pros and Cons of technology

Of course, like all technology it has its pros and cons, and for that reason we will examine some of them. 

Pros

  1. Enables access to financial services for millions of people who are not banked. This is undoubtedly a golden opportunity to bring development and financial freedom to those who for different reasons have not been able to enjoy these services. 
  2. It makes international financing of companies and projects much easier. DeFi platforms can be tailored to the needs of a target audience to bring development and investment where it is needed. And those investments can come from anywhere in the world safely. 
  3. Create a new point of economic diversification and development. In fact, DeFi can signify an important economic development point in the medium term due to the enormous economic potential of cryptocurrencies like Bitcoin. 

Cons

  1. Security is still a polishing point within DeFi platforms. Although the blockchain has proven to be a very secure technology, there are still many things to improve, especially with the level of security and security auditing of smart contracts. A failure in a smart contract means a failure in the platform, as demonstrated The dao
  2. Action protocols in the face of cryptocurrency volatility. Many DeFi platforms have created operating mechanisms that guarantee their economic stability against the volatility of cryptocurrencies. However, these mechanisms often seem insufficient. Or they simply do not fully protect the ecosystem against strong fluctuations. A situation that leads to millionaire losses. A case of this type is MakerDAO y DAI, whose fluctuations and corrective actions have shown that decentralization and poorly adjusted action protocols can often be a weakness for these platforms, if they are not handled correctly. 

DeFi and FinTech What are their differences?

Now we have in our hands three finance models that to some extent have the same common objective, which is to offer us powerful financial tools to help us strengthen our finances and portfolios. However, the way in which they achieve this is completely different for each of these models. If we are talking about traditional finance, the new FinTech and of course DeFi. 

We already know traditional finance, the centralized model, highly dependent on banks, convoluted, complex and unattainable for the vast majority of the world's population. We are talking about a model that we are already seeing as it enters its decline, not only because of its inability to innovate, but because the very people who support it have begun to understand that these tools no longer work in today's world.

From the attempts to renew and improve that old system, comes our second model, FinTech (Financial Technologies - Financial Technologies). We are talking about an attempt to create a digital finance system that allows reaching a larger number of the population that is fast, efficient, cheap, global and above all easier to handle. Since the 90s and the beginning of the new millennium, FinTech has risen as the pinnacle of financial technology and it seemed that it would be the next evolutionary leap in global finance. 

However, that was left behind with the departure of Bitcoin, the arrival of Ethereum, and the first DeFi systems. The fact of being able to build decentralized, safer, more universal finance, without borders, definitely changed the rules of the game, not only because of its operation but also because of the possibilities of DeFi.  

So we can compile A small list can help us to differentiate them: 

  1. A FinTech is a centralized entity, built on software and with controlled and objectionable environments. On the other hand, a DeFi, works, deploys its software on a decentralized blockchain.
  2. FinTech contracts are contracts that follow the legal construct that we all know. While in DeFi these contracts are established the same for everyone, the heart of a DeFi and its services are the smart contracts in blockchain that we can freely see and audit. 
  3. The approval decisions of a FinTech are tied to a bureaucratic chain, long or short, that means time that as users we lose waiting for a response to our requests. On the other hand, in a DeFi the chain is reduced between you and the person who will give you the credit, sometimes, the chain does not even exist, because the approval is carried out automatically if you meet or exceed the requirements that the platform asks for. access their services.
  4. A FinTech uses banks and the entire traditional finance structure to get you the resources you ask for. That means that yes or yes, you need to be someone who is banked and registered in the system to participate with certain guarantees. It also means that that money can be censored or limited if they wish. At DeFi, this is not something to worry about, you don't need to have a bank account, just one cryptocurrency wallet where to receive your funds and the rest you have freedom. 

Given this vision, it is quite clear that a FinTech is a digitized financial entity. Some well-recognized FinTech projects globally are Coinbase, Revolut or Paypal, to name just a few. 

Differences between traditional finance, fintech and DeFi

Potential DeFi use cases

However What good are DeFi for us today? What uses can we give them? Well, first of all, DeFi serves as a financial bridge between the wealth of cryptocurrency holders and a world of financial services that can be granted by making use of that wealth to generate more wealth with it. 

That said, among the potential use cases of DeFi we can mention:

  1. Decentralized lending systemsWhich in fact is one of the main use cases for DeFi today. The system is simple: if a person wants a loan and wants to use their cryptocurrencies as collateral or guarantee, they can do so without problems. The system works in a very similar way to FinTechs or traditional finance. But DeFi usually offers better interest terms, and loans are generally approved almost instantly. Gone are the hours in the bank, sending digital documents and waiting days for a response, with DeFi you just have to interact with the DApp, make the required guarantee deposit and you will have in your possession the money you have required in loan, and all in a few minutes. 
  2. Decentralized markets: Another use case for DeFi is decentralized markets. Creations such as decentralized exchanges (DEX), investment pools, financial derivatives, staking systems, prediction markets, and more are possible thanks to DeFi. 
  3. Payment systems: Another use for DeFi is as payment systems. The characteristics of these platforms allow them to be a trustworthy bridge to process payments from different blockchain making use of an external, decentralized and autonomous infrastructure. 
  4. Banking and insurance services: Another use of DeFi is to offer “banking” type services without being exactly a bank. For example, there are DeFi protocols that allow their users to make a certain investment. But after a while, you can receive this investment with a profit margin, and all thanks to the interest that it has generated. But not only that, but there are also systems that allow the issuance of stablecoins, as well as digital identification and financial insurance systems. 

At this point it is clear that the potential of DeFi to offer services and solutions is varied, as varied as the inventiveness of the people who develop such systems. 

Risks to consider in the DeFi world

Now, in DeFi not everything is perfect. In fact, the truth is that there are risks that it is good to know before entering fully into this world just like that. Among these risks we can mention: 

Complex contracts and platforms to understand and use

First of all, DeFi is not for everyone, no matter how much they want to pretend otherwise. If you enter a DeFi DApp and try to perform an operation, you will surely see that in the middle of all that there are concepts that for the average person may seem strange. Not only that, the DeFi contracts and app web explanations, as well as the smart contract of such apps may seem like a lost language of the world to most people. 

That said, it is good that you are aware that although DeFi offers enormous possibilities, you must first of all know what you are participating in and investing in, and that happens by learning and understanding what the platform does, how it does it and what tools you have available. All this in order to avoid painful situations such as the loss of your investment. 

An incomplete decentralization

Second, DeFi applications while running on a blockchain like Bitcoin, Ethereum, EOS o TRONThis does not mean that they are fully decentralized. DeFi protocols and applications generally have some point of centralization that allows them to have a certain degree of control for situations in which immediate intervention is warranted. An example of this is MakerDAO and its stablecoin DAI. 

While MakerDAO functions as a decentralized entity, the figures behind the development of the protocol have what could be called a "Panic Button" called "Emergency Shutdown". This functionality of the protocol allows to close all the operation of MakerDAO and DAI to avoid that investors suffer serious losses due to some problem in the collateralization of the protocol. You can imagine that just as there are functions like these in MakerDAO, the rest of the projects will also have a similar and even greater function. 

But why is this a risk? If you think about it, functions like these can be exploited by malicious actors inside and outside the protocol to cause damage within the protocol. It is also a risk because many DeFi are sold as a panacea for decentralization, when the reality is very different. A problem that is aggravated if we add the appearance of DeFi protocols that are nothing more than a script scam. 

In short, you know the project where you participate well, you know its functions, but above all you know the community that supports it. A transparent community will not hide anything, as in the case of MakerDAO who made public the information about “Emergency Shutdown” and the reasons for its creation. If you suspect something like that, be especially vigilant with new and little-known projects. 

Security is not foolproof

While it is true that blockchain security is excellent, it is also true that it is not infallible. The best example of this we see in the various DeFi projects that have suffered from security problems related to their smart contracts and that have led to millionaire robberies of their platforms. Platforms like dForce, Uniswap, Balancer, Bancor, bZx and Synthetix, are just some of the victims of the most notorious hacks in this sector. 

The problem is even more serious, because the security of smart contracts depends on two factors. First of all, it depends on the good coding and construction of the same by the developers of the DeFi protocol. Thus a good project, codifies, reviews and audits its smart contracts constantly. That way, if you detect an error, you can quickly correct it without delay. 

Second, security also depends on the good programming of the functions that make its direct operation on the blockchain possible. For example, a security problem in a function of the EVM that affects these smart contracts, and automatically their security is at risk. The problem with this last point is that security no longer depends so much on the developer of the DeFi protocol. Instead, it's up to the blockchain developers, and in case it can't be mitigated properly, you'll have a serious security issue. 

Yes, it sounds like a horror story, and that a technology that is assumed to be ultra-safe can have these problems is surprising. However, they are real problems, in fact the function DELEGATECALL of EVM, was the cause of an attack that occurred at Parity wallets in 2017. 

The danger of scams

If you have been in the crypto world long enough, you will surely remember the ICO boom of 2017 and 2018. And you will also know what this meant for many: millionaire losses and scams everywhere. At this point, DeFi is beginning to go through the same process. In fact there are hundreds of projects masquerading as DeFi to scam those who fall into the trap of making quick and easy money.

In fact, in the midst of the DeFi boom, which is in vogue, it is not uncommon to see platforms looking for the easy way to develop their ideas. An example of this is seen in dForce, who simply copied the protocol from Compound (version 1) to launch your platform. As a result, the dForce platform fell victim to a security issue that they undetected and incurred heavy losses.

As this situation many more can occur, copy a smart contract, change some things and launch a service with the sole purpose of scamming those who fall into the trap. It's something that happens more often than you might think, and one of the reasons you need to be very vigilant when you enter the DeFi world.

How much do you know, cryptonuta?

Can DeFi really be the bridge of access to financial services for the population that does not have access to them?

TRUE!

One of the most amazing things about DeFi is its ability to “bank” and provide access to financial tools to more people around the world. This is a situation that will certainly boost the economy of small countries where access to banking and financial services is extremely complex, and where DeFi can play a vital role in enabling access to these tools. This could mean access to credit and savings, which would allow these people to improve their quality of life. However, this requires a lot of work within these platforms.

DeFi platforms today

Currently, the development of DeFi platforms is gigantic. Bitcoin and Ethereum collect the largest and most important. Only between these two projects already 70% of the capitalization of cryptocurrencies is controlled, that is almost 200 billion dollars.

That has attracted many companies to start exploring the creation of tools, DeFi, some with more success than others, but among them we can mention:

  1. BISQ, a P2P exchange protocol built especially for Bitcoin and completely decentralized.
  2. RSK, a protocol and set of services identified as RIF OS, a complete development platform that includes smart contracts, digital identity, decentralized storage, instant payments, cross-chain bridges, integrated payment system, decentralized communications, and generation of decentralized markets.
  3. 0x, a protocol for building decentralized P2P exchanges that works on Ethereum. This protocol is the building block of our Bit2Me DEX, Bit2Me's decentralized exchange.
  4. Bancor is a token exchange system built on Ethereum.
  5. Compound, is an investment pool protocol with options for lending, yield farming, and liquidity mining that has gained great relevance during 2020 to the point of displacing MakerDAO for two weeks as the DeFi of the highest value.
  6. Kyber, a swap protocol for integrating exchange functionalities in applications with cross-chain operations.
  7. MakerDAO and DAI, one DAO and one stablecoin designed to facilitate the creation of financial applications built on Ethereum.
  8. Augur, a protocol for creating prediction markets.
  9. Curves, a DEX of stablecoins.

This is a small list of some of the most important DeFi applications that exist today. Naming them all would be a daunting task due to the diversity of tools that exist today. But those mentioned here have earned a place of honor due to their seriousness, commitment and active development.

Given this, there is no doubt that DeFi and its different applications will be increasingly important in the future. After all, we are just exploring these tools and acknowledging their scope.