What is Decentralized Finance: An Introduction to DeFi
DeFi (Decentralized Finance) is the abbreviation that the community (or the market) uses to refer to the suite of blockchain finance protocols, products, and applications . Some also call it Open Finance or Money Legos.
The term emerged in 2018, when pioneering companies in this market came together to discuss and share experiences. Since then, the number of DeFi projects has grown day by day and the products more elaborate.
These projects mostly aim to recreate financial products through decentralized functions and protocols.
They enable functions such as issuing collateralized debt, exchanging risk with swaps, buying and selling protection with options, trading futures, making and operating synthetic assets (representation of real assets like gold on blockchain), money streaming Uniswap clone (yes, you can already receive your salary per second), lottery without losing the ticket value and others.
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As everything in this space is still very new, most of the products that exist today are focused on serving native users, that is, people who know the crypto world very well and actively participate in the DeFi community.
It is visible in the language, UX and positioning of these companies. Also, as the products are created on such a different basis from the traditional market basis, some new and different things become possible here.
When the internet emerged, most businesses found ways to do what they were already doing in the real world, in an improved way in this new virtual space. But, as time went by, some things came up that were only possible because of the internet.
This seems to be happening again with DeFi. For some things, DeFi manages to offer a better application than the traditional market. But as time goes on, we can also see that new opportunities appear, which are not possible in the traditional market.
For example, streaming money. Reminds us of Rob, my friend, from time to time.
Basic concepts for understanding DeFi
To understand DeFi it is important to have knowledge about some key concepts of this market.
Blockchains
Blockchain is a type of code. There’s a lot. The first generation was Bitcoin in 2008 and had a single purpose: transfer of resources.
The second generation of blockchain was born in 2015, with Ethereum, and it became possible not only to transfer resources, but also to program them.
Have you ever thought about receiving interest per minute? Or get your pay by the minute?
DeFi started on the Ethereum network and has evolved very fast.
Today it is the blockchain that has the most active community in projects that try to recreate financial products in functions and protocols, and 100% of the time that DeFi is mentioned, Uniswap clone script it is understood that it refers to some project on that network.
On being decentralized
Bitcoin is considered a code that has everything to be decentralized, but there are controversies .
Anyway, what does it mean to be decentralized? It is to leave the functioning of that (whatever it is) distributed enough that it is not possible to turn it off. Like the internet. You can’t turn off the internet.
What happens to the bank if someone shuts down Amazon’s databases? The bank stops working (even for a few minutes).
With blockchain there is no such thing, you cannot turn it off. And that’s why we say that being decentralized is also being blameless.
The community, however, is divided into degrees of utilitarianism when it comes to decentralization. Some are radical and reject any level of centralization (some even organize themselves in their own companies in a decentralized way — that is, without a CEO, without a Head, each man for himself), others see advantages in technology and find centralized solutions.
Or, some see benefits in decentralization but don’t know how to do it at first. So they start in a centralized way with the promise of decentralizing in the future (believe me, it is possible to do this by putting governance mechanisms).
But anyway, DeFi references the decentralized aspect of the market already in its name. It is important to the community that the protocols are decentralized enough that it is not possible to censor them or shut them down.
Custody
Cryptoassets (also called tokens) work like bearer bonds and the user himself can choose how he wants to keep it. There is more than one way to take custody of your tokens and they vary in security levels.
In general, they are all called wallets. Some are simply an extension of your browser (like MetaMask ), some are applications, some are called hardware wallets (and it looks like a thumb drive).
Example of a hardware wallet
It was a bubble, life goes onvJust like any other bubble. I think it’s cool that the community itself knows this and has a sense of humor. There is even a Shitcoin index that you can short.
A positive point is that after the bubble the vast majority of bad people withdrew, leaving space for real development to take place.
Open source community
The blockchain community has many similarities with the open source code community and that means here people work on a code and then leave it open, public. Anyone can view, copy, correct or criticize. Uniswap clone software Almost everything done on blockchain is open.
Speed
The speed at which development happens here is absurd. Every two days you see a new product or protocol being tested.
If you want to follow the development of DeFi on Ethereum , I suggest following the top journalists in the space on Twitter, that’s where it all happens.
Despite the speed and amount of new projects in the area, it is worth remembering that DeFi emerged in 2018! We are still under construction.
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