Decentralized finance (DeFi) is based on blockchain technology. It was born as a way to offer financial products and services to users without the need for intermediaries or trusted third parties.
DeFi is a term that has become very common today, and that is defining a new way of perceiving traditional finances. Just as Bitcoin did when it appeared in 2009. Since then, it has been revolutionizing our way of seeing money.
DeFi, from English decentralized finance, came to radically change the way the financial sector had been operating for many years. A sector that has remained practically static, without evolving, becoming obsolete and non-functional. Above all, taking into consideration the many technological advances that we enjoy today. And that could significantly improve the quality of the services that these institutions offer.
For the most part, banks and financial institutions create products and services to have a portfolio to offer to users. But at the same time, these products and services also seem to have another purpose: to generate large economic benefits for their creators. An aspect that of course does not consider in many cases satisfying the real needs of customers, but rather their own benefit.
For this reason, and thanks to technological development, DeFi is born. An implementation of blockchain technology with great potential capable of radically transforming financial services. Creating a world where any user can employ completely decentralized, transparent and highly efficient products and services.
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But what is DeFi?
A DeFi is a decentralized ecosystem based on blockchain that transforms financial products into decentralized protocols and applications that operate without intermediaries. The purpose is to provide users with a fluid interaction with these products and services, directly using the platforms.
That is, DeFi offers financial products and services based on an open source ecosystem. Therefore, it does not require the permission or authorization of an entity, intermediary or trusted third party. In addition, DeFi guarantees absolute transparency and reliability in all financial processes carried out within its applications. Where users themselves have control over their assets, interacting through a network of equals. peer-to-peer (p2p).
Likewise, within DeFi, users will be able to carry out their operations digitally from wherever they are. In addition, they will not have to pay large commissions, which were typical of the entities that provided these services. They will be able to better manage and handle their money and finances.
DeFi therefore has great potential to create decentralized and self-sustaining ecosystems that can grant users full control over their assets, without requiring the services of a central entity.
How did decentralized finance originate?
The term DeFi was introduced to the financial sector as an evolution of the well-known FinTech of the 20th century. A type of industry that implements technology to improve financial services. But with the creation and evolution of cryptocurrencies, today it is possible not only to bring traditional finance to technology, but to do so in a decentralized way. This has given rise to this new financial model known as DeFi.
For its part, decentralized finance was widely made known through the Ethereum network. Thanks to its ecosystems of smart contracts made the implementation of DeFi possible. With applications focused mainly on financial lending and liquidity systems and decentralized exchanges (DEX).
However, the foundations of this new financial model date back many years. DeFi are implementations based on blockchain and smart contracts. So when computer scientist and developer Nick Szabo presented a publication called “Smart Contracts: Building Blocks for Digital Markets” in 1996, laid the groundwork for the future of this technology.
In this post, Szabo presents his idea as a kind of autonomous and intelligent contract incorporated into a software or system, where the necessary conditions and clauses would be established that the contract itself would be able to execute by itself.
Thus, although Szabo's idea was a bit ahead of its time, the arrival of Ethereum made this implementation possible. At the same time, it integrated the dApps, decentralized applications capable of running automatically on the network's blockchain. With both tools, DeFi could finally become a reality.
Well, through smart contracts and dApps, an operating system is developed that is known today as DeFi.
On the other hand, it is also worth highlighting that the way Bitcoin has operated since its inception in 2009 also represents a DeFi. Being digital, decentralized, without intermediaries, transparent, secure and reliable, Bitcoin can be called the first DeFi project; and the largest to date.
Importance of DeFi today
The main advantage of decentralized finance is that They eliminate the need for intermediaries or central entities that control our money.. In DeFi, all users maintain absolute control over their assets and their movements. In addition, by eliminating the need for third parties, it is also significantly reduce the costs of the operations carried out. We must not forget that banks and financial institutions charge a hefty commission for their services, which in many cases can reach up to 10% of the transaction amount.
Likewise, since DeFi is run on blockchain platforms, there are no single points of failure that allow attacks on them, guaranteeing security and reliability in all processes.
Potential uses of decentralized finance
The current development of DeFi platforms is enormous. Thanks to its potential, decentralized finance can be applied in multiple areas. For example, for the Approval of credits and financing. Where DeFi offers great advantages, such as instant settlement of approved loans and financing, traceability in movements, standardization and much more.
Likewise, in the markets the contribution of DeFi is fundamental. Thanks to these platforms, decentralized exchanges and markets are possible. As in the financial systems, where the benefit of its use and implementation can be more than evident.
Conclusions
There is no doubt that decentralized finance is changing the paradigm in financial services. With the implementation of blockchain in all these aspects, a much more balanced, transparent and reliable system can be achieved. It will be in constant evolution, development and growth to offer the best quality in the services provided to users.
With so many advantages and benefits, there is no doubt that many more people will want to be part of the crypto ecosystem. Increasing investments and, therefore, liquidity in the crypto markets. An ideal scenario of prosperity for all participants.
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