What is DeFi? What is it and how does it work?

What is DeFi?

You have heard this term many times, but in most cases it is unclear what it means, because the word is used to describe many things.

DeFi (decentralized finance) is a term that does not have one clear definition, as it covers a wide range of products and services. Usually, DeFi is a software protocol on Ethereum/Cosmos.

The first such protocol was BitShares in 2014. It provided the ability to issue and trade stablecoins. The launch of Ethereum helped decentralized finance, and the doors to this niche opened as wide as possible, and by the way, stablecoins continue to use decentralized finance technology.

One of the best examples of DeFi is DAO, which we have already written about in more detail here. (https://cryptology.school/blog/shho-take-dao-vicerpnii-posibnik-iz-decentralizovanix-avtonomnix-organizacii)

The main idea of DeFi is the absence of intermediaries and the ability to interact financially through various tools, such as applications on the phone.

The essence of DeFi

• Strangely enough, it is decentralization. There are no intermediaries that can regulate or control the money circulation and actions of participants. Instead, there are smart contracts with clearly described working conditions.
• Accessibility and openness. DeFi is open to anyone with an internet connection. Transparency encourages trust. Absolutely all financial transactions in the DeFi network can be verified and tracked in the blockchain. Such openness attracts people and investments. It is clear that transparency is not a plus for everyone, but it helps to weed out fraudsters, who are plentiful in the crypto space.
• Liquid market. Despite the fact that decentralized finance has not existed for long, there is liquidity here, which is important for everyone who interacts with it. Currently, there are some difficulties with this point, but they are mostly related to the fact that this market is quite young.

What does the term DeFi cover?

You've probably heard the word DEX - it's a decentralized exchange where you can make an exchange without the participation of other participants, for example, without a centralized exchange like Binance. DYDX is a decentralized exchange, where the essence is decentralized exchange without intermediaries. Direct purchases and sales through direct exchange of assets. The main advantage is that participants' funds are not stored on the exchange, but on their own wallets.

Also, DeFi includes decentralized access to money markets, obtaining loans in cryptocurrency, decentralized insurance services, and other decentralized financial instruments - all of this is DeFi.

Cons of DeFi

1. There are no clear rules of regulation. The DeFi sector is currently working this way. Only clients are responsible for losses and actions.
2. Problems with price fluctuations due to liquidity. Yes, the market is liquid, but at times it may not be enough at peaks of 
   volatility. The possible volume of loans here is much smaller than in banks. This is because the decentralized finance market is still young. New participants and rules of interaction will encourage changes for the better.
3. There is also a risk of smart contracts being hacked. A critical mistake or miscalculation can negatively affect the system and its performance. Due to the hype, many fraudsters have appeared here, inventing new ways to cheat. Quite often, they create fake DeFi projects, raise funds, and disappear.

The difference between CeFi and DeFi

In centralized finance, clients transfer their assets to accounts to a third party (an intermediary, an exchange, for example), where companies act as creditors who store and manage client funds. Usually, all transactions take place through exchanges or trading platforms, where they are responsible for all processes while maintaining the rules of the platform. In decentralized finance, clients control their assets independently.

Regulation

Earlier, SEC Chairman Gary Gensler said that DeFi is also subject to regulation. Will decentralized finance remain the same after regulation? Yes, but there will be new and clear rules of operation.

The DeFi market has its customers and continues to develop despite the difficult market conditions. The technology has an application and a place in the financial world. There are some disadvantages, but most of them are related to the fact that the technology is quite new and it takes more time.