Decentralized finance is an alternative version of financial relations, which are formed within enterprises, organizations and other forms of interaction between companies and individuals.

Today's Defi is based on blockchain technology and offers users free access to an open, secure and universal financial system. Within this system, a global network of integrated protocols and effective financial instruments has been developed. Today, decentralized finance is becoming an increasingly active sector of the economy in the blockchain space and offers many different applications.

As an example, consider the compound of decentralized finance, and learn what the benefits, features, and methods of using the DeiFi system are.

What is decentralized finance?

A decentralized personal financing system is based on smart contracts and gives everyone free access to digital capital. The DeFi market is constantly evolving - it is a perspective and multifunctional platform, offering a lot of options for practical use - decentralized exchanges, lending, money-banking services.

Intermediaries (like banks or electronic payment systems) are excluded from decentralized financing - their function is performed by smart contracts. This form of financial transactions is a programmed contract between the parties of the agreement - self-executing deals. They are only closed when both parties have fulfilled their obligations. Thus, users work with finances without centralized intermediaries, which is especially important when banking services are unavailable or inappropriate for some reason.

The DeFi platform is a complex software, based on blockchain and the Ethereum cryptocurrency. However, the term "decentralized finance" should be understood much more broadly - as an open, free and completely transparent ecosystem of financial options, available for everyone and functioning without interference from the government and centralized authorities.

Benefits

Financial institutions, which are controlled by governments and banks, do not always live up to the expectations of citizens. Until recently, however, they had no other options but to use currency as a means of payment and banking institutions as intermediaries. Decentralized sources of financing offer an alternative to the established system.

DeFi's main benefits are: 

● Users within the system have full control over their assets and can interact with the platform independently through peer-to-peer networks and special applications:

● No intermediaries are required in financial relationships. The software code assumes a clear and fair resolution of any potential dispute, and decentralized incomes are not controlled by banks.

● The costs of maintaining, providing, and using financial funds are reduced.

● Participants have complete control over their financial assets and access to them. No one can block accounts and no fees are charged for custody and intermediary services.

● All DeFi protocols use open source code. This means anyone can develop a new blockchain-based product and create their form of value.  

● Everyone in the system has the right to verify any transaction in the blockchain. The risk of cheating or withholding information is minimized.

● Automation of many business-processes, which previously were controlled "manually".

● Transparency. Unlike traditional financial institutions, the blockchain platform provides unlimited access for everyone, regardless of geographic location and sometimes even without minimum funds. The user only needs Internet access and a Crypto Wallet.

In DeFi, the legal language in contracts and transactions has been replaced with smart contracts and software code. However, decentralized finance projects should not be confused with modern financial technologies. Modern financial technology involves the transfer of the traditional system of money payments on the Internet, while DeFi operates based on fundamentally different blockchain technology.

Where you can use DeFi - examples

Lending

Today, this is the most relevant and fast-growing sector of decentralized lending platforms. The working principle is similar to banking - some participants of financial relations invest their assets, while others borrow. However, they do not lend money, but crypto currency, with users being linked by smart contracts.

A digital code guarantees compliance with the terms of the loan and distributes the rates of interest. There is no need to rely on trust and pay interest in intermediary services, which makes borrowings less costly for borrowers and more profitable for lenders.

Decentralized Marketplaces.

DeFi-platforms allow participants to sell digital products without intermediaries (markets). Trades are executed directly between e-wallets through smart contracts. Because there are no fees for maintenance, asset protection, and use of functionality, commissions are much lower than on conventional markets.

Asset management

Members of the ecosystem have much more freedom in the use and management of their assets than bank clients. Convenient and easy-to-use tools provide a wide range of opportunities for investing, calculating and other operations with finances.

Derivatives

The system's derived instruments, called derivatives, are contracts between parties to an agreement whose price changes by the dynamics of the underlying assets. These resources protect investors from price fluctuations.

Insurance

Digital insurance protocols on DeFi-platforms provide security for smart contracts and cryptocurrency assets. The decentralized insurance market is still small but has excellent prospects for growth shortly.

Ways to make money with DeFi

Any system dealing with assets (both traditional and digital) assumes earning from them.

Let's point out the main ways of making a profit:

● Interest on deposit. You get money for providing the platform with your assets.

● Farming. A perspective way of earning, in which funds are invested in smart contracts. These protocols, in turn, distribute assets to users, and the fund provider receives remuneration.

● Buying control tokens. Such assets can significantly and quickly grow in value and, after selling, bring profit to the owner.

Despite all the benefits and prospects of DeFi, we should not forget about the financial risks. The mechanism and principle of operation still need to be debugged. The platform has relatively low performance, as blockchain is slower than centralized systems. Also, there is a high probability of user error - all responsibility lies on users, not intermediaries. Another risk is the high volatility of cryptocurrencies, which can lead to unforeseen financial losses.

Conclusion

The ecosystem of decentralized finance continues to grow and evolve and has enormous potential. Transparent and multipurpose financial instruments have all chances to become the main driving force for the worldwide spread of cryptocurrencies. Even today, the total amount of capital investments involved in the system exceeds $900 million, and this figure will only grow. According to financial analysts, in the future, blockchain-based networks and cryptocurrencies may lead to the emergence of fundamentally new types of money markets, products and services.