What is Defi, what are its benefits and features and more

What is Defi, what are its benefits and features and more

Franco Brutti

Apr 21, 2023

Apr 21, 2023

Apr 21, 2023

What is Defi, what are its benefits and features and more
What is Defi, what are its benefits and features and more
What is Defi, what are its benefits and features and more

Understanding the Defi system is possibly one of the most important tasks for today. And you may ask: what's so interesting about this concept, why should I learn it? 

Because it’s about the future of our economy. 

And yes, it's that complex, traditional financial systems are already starting to be replaced by these decentralized systems

But, we won't get ahead of you with the information! It's enough that you can understand that this is important to everyone. 

Economics and finance topics may not be for everyone, and partly true, not everyone is born to be an economics expert. 

But beware! That finance and economics does affect everyone and therefore, it’s necessary to know a little in this area, for our security and stability. 

So, how about giving the Defi system a spin? See it has a lot to offer and it’s still in full development, in time, it may become our standard exchange system.

 Let's get started! 

What is the Defi system? 

It’s a term that means decentralized finance. When we talk about crypto assets, we are intrinsically involving a Defi system, that is to say, a financial system that is born digital, that is to say, it doesn’t have a regulatory body

It uses a system of encrypted blocks, known as the blockchain, which is the security layer that these systems have to protect user data, but it is also what allows the exchange and trading of assets. 

In short, it changes everything you’ve known so far in traditional systems. But what is a traditional financial system? You may ask...

Well, it’s all those financial processes that you perform through a bank or a stock exchange system. These systems are in charge of taking care of and safeguarding the money of their contributors or clients, and they are the ones that regulate them in the operations.

For this, taxpayers or customers, in general, must have full confidence in the system with respect to the money, since this is what allows the existence of the same. 

In the Defi system, all these changes enable the following: 

Eliminating the intermediaries - now the responsibility of care and exchanges is on your side. That is to say, it’s direct. 

The financial operations are carried out through a system of intelligent contracts. Based on cryptography, no operation is the same as another and, at the same time, it’s more secure. 

The security of the operations is really high, however, the person must be aware of who he/she is trading with and what is being traded. In case of any type of fraud, there is no way to make a complaint, since the exchange was made knowingly by both parties. 

7 Essential Characteristics of the Defi system 

Therefore, it’s necessary to be able to analyze the characteristics of this financial system that is growing more and more in the world. What are those details that identify a Defi system? Well, pay attention to the following: 

1. There’s no manipulation 

One of its strongest and most recognized points is also one of its main characteristics. Being integrated and structured in conjunction with a blockchain system, a secure type of negotiation is ensured. 

But why? Easy, none of the parties that are conducting a business can manipulate this system in their favor, so the benefit is always the agreed one. 

This is possible thanks to smart contracts, which use cryptographic technology as a form of signature of consent to the procedure. Once this contract is deployed, it cannot be altered in any way, it can only be deleted if the option is enabled for users. 

2. Financial system without third parties 

For this financial system to work, there’s no need for a trusted regulatory body to validate the business procedures. It’s enough with the blockchain who’s in charge of validating all these procedures through its miner and validator nodes. 

3. Accessibility 

What if we told you that anyone in the world with internet access can be part of a Defi scheme? Because it’s true! Another one of its greatest features is that it’s available to anyone and from anywhere in the world.

This means that even though you may not have access to a conventional or traditional financial system, you don't have to run out of options. Since you will always have at your disposal a Defi system in which you can participate without limitations, that’s why it’s considered a more agile and flexible system. 

4. Transparency 

If you want to know the details of any or all the movements you’ve made in your account with a Defi system, you can do so at any time. 

All operations have blockchain technology that has its own reading format for when you need to audit your movements. So don't worry, you will have history available in case you need it. 

5. They are open source 

This may be a bit of an attention grabber in case you are a professional programmer or you love the world of technology and tech development. But yes, Defi technology is open source, which allows anyone with knowledge in the area to read the code and study it. 

It's a good way to understand how secure the software itself can be. And, if you want, you can even download the code to use the source code and modify it to create your own application or Defi technology tool. Isn't it amazing? 

6. It’s a very secure system

Maybe the fact that it is an open-source technology makes you doubt the security of the Defi system. But the truth is that it is very secure, and all this is thanks to the Blockchain. 

Because of the cryptographic technology, and also because every movement generates a backup, this system is almost infallible to hack or alter. This is thanks to the miner nodes that keep copies of smart contracts, making the possibility of altering any element impossible. 

So no, you don't have to worry, this system is quite secure, and Defi schemes usually have a lot of additional protection regarding account access. Not to mention those crypto-assets that can be stored in an external memory like a USB stick. 

7. It is decentralized 

Maybe one of the reasons why some internet users choose to use this business model is because they are not associated with any public or governmental entity.

That is, since there is no regulatory body because blockchain is not governed by the rules or constitutions of different countries, it makes it a very attractive business model and, although it may not seem so, more reliable. 

But why? Because you and only you are responsible for your transactions and business. It gives you greater market autonomy and therefore, the processes are more automatic.  

7 essential features of the Defi system

What are the uses that can be given to Defi? 

Very well, we’ve already talked about the concept and the most outstanding characteristics of this business scheme. But, what is the methodology of this scheme, how can it be useful for Internet users? 

Well, here are some examples: 

1. Decentralized Exchanges 

You are in the presence of one of the first methods or applications in which a Defi system can be applied. And it’s not for less, there are great advantages that they offer with respect to other currency exchange exchanges; we will mention a little more about this. 

The first thing to know is that decentralized exchanges currently have the largest number of projects regarding this business model. And the reason is simple: security, low commissions, and a large arsenal of exchange tokens. 

And how does this business model work? Well, it's simple, all crypto assets and tokens that are part of a blockchain model, such as Ethereum in the case of Defi, can then be exchangeable. 

  • Exchanges have very low and sometimes zero commissions because they belong to the same blockchain model. 

  • Because they are decentralized, it allows a greater flow of assets than from centralized sources in addition to their high commissions. 

  • They offer a very high level of security in operations.

One of the best examples we can give you about this type of model is Binance, which is currently the most popular exchange in this business model, although it’s not the only one with great importance and active members. 

2. Money services 

Another one of the most outstanding uses of this type of scheme is the famous stablecoins, which is nothing more than a currency whose price fluctuation is not as volatile as any other cryptocurrency. These are similar to stable currencies such as the dollar or the euro and can be worth the same as these. 

An example of these stablecoins can be either the USDT or USDC. They are even taken into account for real banking transactions in some parts of the world. 

On the other hand, for streamlining mortgage loans and insurance, it’s also an excellent option. Since they eliminate much of the bureaucratic processes they usually have, making the slowness, cost, and complexity decrease considerably. And all this, thanks to smart contracts. 

Now you know, if you need a mortgage loan or invest in insurance, you can make use of this scheme so that the process of obtaining these benefits is much faster than by traditional methods.

3. Loans 

This type of business is already very popular in the Defi system, known as open lending. Here a credit provision is obtained or granted without an intermediary, therefore, it’s decentralized. 

This allows you to: 

  • Add instant settlements on the transactions made, which cannot be done in traditional credit systems. 

  • Digital assets can be patented more easily, which allows the possibility of becoming owners of such assets. 

  • Credit controls no longer exist, as can happen in a bank, and it’s possible that in the future standardization of these controls will be created. 

Strengths and Weaknesses of Defi systems 

To better understand if this type of system can work for your business model, it’s necessary to know its strengths and take into account some weaknesses. In the end, it all depends on each user and what they value most in business.

Strengths 

  • Offers financial solutions to people who are not affiliated with a bank, whether they are adults or minors. This allows for greater financial independence even from an early age. 

  • Do you have any type of business project that requires financing? Through the Defi business model, it’s possible to simplify this process that otherwise could become very complicated. 

  • Smart contracts, being open source, make them a very versatile and flexible system. If there is a Defi platform that has certain limitations, someone else can take the source code of this Defi and create their own by developing the best ones to meet those needs. 

  • It offers security with respect to exchange operations since once validated, it cannot be modified. This eliminates the possibility of altering any cryptographic pattern and therefore, the clauses are not modified and may favor any of the parties. 

Weaknesses 

  • The transaction processing capacity in the Defi ecosystem is quite limited even today. While other centralized systems can offer up to 50 thousand transactions per insurance at the same time, Defi systems are usually very limited in this aspect, supporting from 4 to 20 transactions. This may explain why the systems sometimes collapse and take a long time to become effective. 

  • A smart contract, despite being secure, can also become a weakness if it’s not well programmed. That is, if the developer has made mistakes in the smart contract development process, it’s possible that operations may fail, so it’s important to take care of this aspect. 

  • The stability of cryptocurrencies is usually very unreliable. One of its characteristics is precisely the volatility of the assets, and although stablecoins are created, these are not perfect in case of very strong alterations. 

What do you think of the Defi system, do you consider it necessary for users, does it really help in many aspects or do you think it should be regulated? We would love to hear from you on this. 

And as always, if you’ve found this information quite useful for you, remember that it can also be useful for others, it could even be a business opportunity for someone in crisis. 

Share it in your groups and networks!