What is DeFi? Decentralized Finance Explained

DeFi is the general name given to decentralized finance operations, consisting of the words decentralized and finance. DeFi refers to financial structures that are not tied to any center or authority.

Systems like Bitcoin and Ethereum that have no central authority or decision-making authorities are ideal examples for DeFi. However, since financial instruments are not limited to just sending and receiving money, it would be correct to think of more advanced financial functions when talking about DeFi. These include lending, borrowing, decentralized exchanges, insurance, shopping, marketplaces and similar functions. Among those enabling such advanced features are tokens listed on our exchange like Compound (COMP), Kyber Network (KNC), 0x (ZRX), Bancor (BNT), Synthetix Network Token (SNX), Maker (MKR), Uniswap (UNI) and Aave (LEND).

DeFi structures must have elements that somehow inspire trust in their users. Although a decentralized structure may seem appealing, it can also be used for malicious purposes. The Bitcoin DeFi structure is secured with an unbreakable and immutable mathematical formula.

There must be a cause-and-effect relationship in all DeFi systems. The possible operations are defined, and it is clear which operations will be performed under which conditions. Therefore, Smart contracts, decentralized applications, and consensus protocols play an important role in DeFi systems.

Why Did DeFi Emerge?

DeFi was initiated to build a more democratic financial system following the emergence of cryptocurrencies with their aim of freedom. Another major goal of DeFi systems is to enable people who don't have access to traditional financial systems to conduct financial transactions.

Approximately 1.7 billion people worldwide cannot access the traditional financial system, namely banking operations. DeFi systems aim to reach these people whom the current financial system cannot reach.

While there are physical barriers to accessing banking systems, people's distrust of centralized banks plays a significant role.

What Makes DeFi Different?

DeFi enables people who don't trust banks to perform banking operations through an algorithm created by the system rather than an authority. It allows operations to be performed through a specific formula with millions of devices connected to DeFi networks. Therefore, intervention by a central authority is impossible in DeFi systems. Users of the system also ensure the system's operation.

In general, the advantages of DeFi systems are:

• It has enabled the emergence of decentralized exchanges.
• It has made money-based banking systems accessible to everyone.
• It has enabled lending and borrowing operations between users.
• It has enabled the introduction of new cryptocurrencies to the market and fundraising for projects.
• It has enabled new usable financial instruments to be made available through DeFi.

What Are the Advantages of DeFi Systems?

After the 2008 global crisis, many people felt distrust towards banks and state central banks. A system where a center dominated all financial instruments in monetary policies and where even banks could suffer losses at any moment was heavily criticized.

Governments' ability to print unlimited money and change valuations increased people's interest in systems that no one could interfere with based on a specific formula.

Bitcoin became the most important asset in this field. It was a DeFi structure where thousands of people could be both users and managers through their participation.

With blockchain, which doesn't require a central authority, the financial sector began to become more free. Users can maintain their own assets and send them to others without intermediaries, following the principle of privacy.

What Are DeFi's Use Cases?

DeFi claims to offer a better system than traditional financial systems. Therefore, it has advantageous use cases compared to traditional financial systems. These generally include:

• Ability to make very cheap, fast, and secure money transfers worldwide.
• Through established lending systems, users can both borrow and lend.
• Ability to tokenize an owned asset, thus giving it value and enabling its transfer.

What Are the Disadvantages of DeFi?

DeFi will fundamentally change traditional finance in many ways. Being at the beginning of this change means there are still some areas in this system that need improvement.

DeFi systems currently have two potential shortcomings. Although it aims to be usable worldwide, the number of DeFi users is currently very low.

As a second issue, such a large number of transactions need to be stored as data somehow. There isn't sufficient infrastructure for storing this data.