What are the characteristics of DeFi & Potential DeFi Use Cases
Let’s see what are the most important characteristics of the decentralized finance ecosystem:
- Non-manipulating: By being integrated into a blockchain, it is guaranteed that they cannot be misused or manipulated in favor of one of the parties. Once the smart contract is deployed to the blockchain it cannot be altered, at most deleted if the function is enabled. develop your Uniswap clone ,
- No third parties: Its operation does not require trusted third parties to verify what is happening. The operation is verified by the blockchain itself, more specifically by the mining nodes and the validators.
- Security: The cryptography and consensus rules of a blockchain add an additional security element. That all nodes keep a copy of the smart contracts (since they keep a copy of the blockchain) eliminates the possibility of alteration.
- Accessible: One of the characteristics of DeFi is that they are accessible to everyone from anywhere in the world. This allows people who are not allowed or cannot access conventional financial systems to have access to a more flexible and agile economic system.
- Transparency: Any transaction in DeFi is easily auditable thanks to the fact that they are based on blockchain technology. You can see all the movements made.
- Decentralization: As they are stored in the blockchain, their operation is decentralized, not governed by the rules of countries or governments . The operation of these is autonomous and automated, once it is deployed.
- Open source: DeFi is based on open source, which allows anyone to read it and verify that it has no security problems. Additionally you can download, use and modify this code for other applications.
Potential DeFi Use Cases
loans
Within the DeFi ecosystem we find open lending (open loans) which are quite popular. This mechanism for taking and granting loans in a decentralized manner provided advantages over conventional credit systems. They can add instant settlement of transactions, increased ability to collateralize different digital assets, the removal of credit controls, and possible future standardization.
As this lending system is based on a public blockchain, the amount of trust required is reduced by relying on cryptographic verification methods. Loan markets built on blockchain technology reduce counterparty risks. Likewise, they make the taking and granting of loans cheaper, faster and available to a greater number of people.
money banking services
One of the solutions that can be developed in DeFi is the issuance of stablecoins, mortgages and insurance. These money banking services are one of the possible uses of these decentralized finances.
Interest in stablecoins has grown quite a bit as they are pegged in a fixed way to the price of a real asset . An example would be USDC, a stablecoin whose unit is worth 1 dollar (1 USDC = 1 US dollar). These currencies protect holders from the abrupt fluctuations that can occur with cryptocurrencies, even being adopted for daily use as a payment method.
They can also be used to obtain mortgage loans , which are usually complex, expensive and really slow. DeFi can create solutions through smart contracts that reduce the time, costs and complexity when obtaining this type of loan.
decentralized exchange
The creation of decentralized exchanges (DEX) is one of the first DeFi solutions developed and the one with the largest projects developed. These platforms allow users to exchange tokens and cryptocurrencies that are working within the same blockchain. For example, a DEX within the Ethereum blockchain allows ERC-20 token creator to be exchanged with each other and with ether (cryptocurrency of the Ethereum blockchain)
Normally DEXs have very low or zero commissions regarding the exchange between tokens. This is one of the strengths they have compared to centralized exchanges, which usually charge “high” fees for each transaction.
Strengths and weaknesses of DeFi
Currently DeFi is an ecosystem that is in an early stage of development and there are many aspects that must be corrected to make it accessible to all users.
Strengths
- It facilitates access to financial services for people who are currently unbanked. It is a great opportunity for people’s financial freedom
- The financing process for companies and different types of projects is simplified. Through DeFi, development and financing can be offered in areas or for companies that otherwise could have it very complicated
- They offer security to all parties, since once the operation is validated, it can no longer be modified . This ensures that clauses are not added or some aspects are modified at will or in favor of one of the parties.
- Smart contracts offer great versatility and ease in creating different solutions . Anyone can write a smart contract or simply access the code of a smart contract and adapt it to their needs
weaknesses
- Interestingly, smart contracts, which are a strength of DeFi, are also a weakness. In the end, a smart contract is nothing more than a code written by a programmer and may contain errors . It is important to properly audit a smart contract before deploying it to avoid problems like the one that happened with The DAO.
- If a financial system needs something, it is stability and that is something difficult in the cryptocurrency segment. The current mechanisms for creating a stablecoin are not perfect and may not protect against fluctuations at times. MakerDAO and DAI, whose correction variations have shown that there may be weaknesses due to protocols that are not mature.
- The transaction processing capacity of blockchains today. Ethereum has suffered from congestion on its blockchain on several occasions due to the high volume of DeFi transactions. For this, an emergency mechanism has been devised that has yet to be implemented and we do not know how it will work. An increase in transaction processing capabilities is required for DeFi to be viable.
