DeFi is one of the most interesting and useful projects of the 21st century. Despite the hype caused by DeFi, this area has a fairly strong potential, as it offers some advantages compared to traditional banking. In this article, we will consider how DeFi development services are changing the traditional financial industry and what benefits they offer to consumers.
Essence of DeFi
DeFi is a financial instrument developed with the help of a blockchain, which usually takes the form of a service or an application. The main goal of DeFi is to replace the technology of the traditional financial system with open-source blockchain protocols. As a result, a huge number of people will have access to new financial services, including decentralized lending and investment vehicles. Users of DeFi services can passively earn from digital currency, as well as save on everyday financial transactions such as transfers, loans, etc.
Most of the existing DeFi services were created using the Ethereum blockchain. The number of new applications in this sector continues to increase.
There are already quite a few services and applications that allow you to exclude intermediaries when making financial transactions. They work with blockchain, smart contracts, and tokens. Let’s take a look at popular DeFi services.
Stablecoins. DeFi allows the development and use of tokens, the value of which is pegged to the value of fiat currency in a ratio of 1:1.
- Lending. DeFi allows you to issue loans secured by digital currency. Consumers can receive credit funds both in stablecoins and in cryptocurrency.
- Decentralized Exchanges (DEXs). DeFi is consumer access to trading without intermediaries. For example, trading on decentralized exchanges does not require registration, and the sale of a new token does not require a listing procedure.
- Insurance. With the help of new technologies, it became possible to secure the smart contract of a DeFi project from errors in the code or hacker attacks through insurance. Many decentralized projects provide for the storage of user funds using smart contracts. DeFi insurance allows users to return funds in case of any problems, as well as generally minimize risks when using the project’s services.
- Entertainment platforms. The use of blockchain technology in the development of platforms for predictions, bets, and lotteries is a guarantee of honesty for consumers. If we talk about the prediction market, then with blockchain technology, any user can check what result the majority of users expect to see. In this case, the accuracy of the expected outcome increases compared to traditional services.
- Derivatives. DeFi also allows the creation and use of tokens whose value is pegged to the value of some other asset. For example, if the price of an asset falls by 15%, the value of the derivative will rise by 50%.
- Payment services. DeFi is successfully used for safe and fast transfers of cryptocurrency funds.
- Services for issuing tokens and investing. DeFi projects such as BnktoTheFuture and Aragon provide users with tools for investing, as well as the ability to integrate decentralized governance into a particular project.
Who is in control of the DeFi project?
The work of DeFi projects is automated. So, for example, the decision to issue a loan to a user or to list a new token is made by a smart contract, not a person. A participant in a DeFi project can influence not a specific operation, but the principle of the system. For example, this may be the principle of issuing loans – a portrait of a potential client, as well as the conditions under which a loan will be issued to him.
However, certain operations cannot be automated. For example, if a bug is found in the code of a DeFi project, then only a person can make changes. For this reason, autonomous organizations – DAOs – have been created to work effectively with DeFi services. The DAO allows users to suggest improvements to the project, as well as support the suggestions of other members of the community with the help of votes.
Potential changes may include:
- fixing bugs in the code
- interface update,
- integration of new functions
- changes in working conditions.
Users have the right to vote only if they have control tokens. These tokens can be purchased or received for active use of the DeFi service. Users who do not have such tokens cannot vote.
After the launch of the DeFi service, the project developers do not have the opportunity to make changes to it on their own. All proposals and decisions on them go through the DAO voting.
Advantages and disadvantages of DeFi
The main value of DeFi projects is their accessibility and openness. These projects do not involve control by centralized authorities, since the implementation of all operations is guaranteed by smart contracts. In addition, DeFi projects have the following advantages:
- open source is a guarantee of transparency in all transactions
- All users have access to DeFi services;
- Anyone can create a DeFi application;
- new DeFi products can be created by combining other DeFi services.
Control over the DeFi ecosystem is distributed among all project participants. In addition to smart contracts, members of the project community participate in the management of the DeFi project by voting. All operations are carried out quickly, without any intermediaries, which significantly reduces commission costs.
Despite all the advantages, DeFi has its drawbacks that you should be aware of:
- systemic risks: liquidity and credit risks;
- high volatility (with an unexpected drop in the value of the underlying assets blocked in the CDP, there is a mass liquidation of assets, which can lead to the collapse of the system;
- the risk of hacking smart contracts;
- data flow centralization;
- lack of funds in DeFi loans.
Built on the Blockchain network, DeFi-applications provide all financial services in a decentralized manner without borders, allowing everyone to access and use all financial services. DeFi- applications allow customers to lend and borrow funds, trade cryptocurrencies, speculate on price movements, and provide risk insurance. Creating a DeFi-app is a great opportunity for a business that wants to provide reliable services to customers. The Aleph1 company will help you to tap into the future of finance. The team of blockchain architects and developers can develop trading products that free you from counterparty trust dilemmas, and intermediaries, and bring transparency to each step of your business.