Decentralized finances -known as DeFi- are a hopeful ecosystem for some and a threat for others, like American Senator Elizabeth Warren, who thinks that DeFi is “the most dangerous part of the crypto world”.
Anyway, it is pretty common to read or hear that DeFi is a game-changer system that was born to bring down the traditional banking system. But, is that true? Does it really have the power to replace a system deeply ingrained in our society?
If you want to know the answers, keep reading! Because in this article we explain the basics of DeFi and how it could reshape the entire financial system.
What is DeFi?
DeFi is short for decentralized finances, the word is an umbrella term for a whole financial ecosystem inside the crypto universe, which is built using blockchain technology.
In this ecosystem, traditional intermediaries and fiduciary mechanisms are replaced to give place to the exchange of financial assets and services among its participants in a decentralized manner.
So, that means that DeFi is like banks but focused on the crypto world? Not necessarily. This new financial ecosystem looks more like an open-sourced Wall Street, where everyday people can access complex financial elements like lending, borrowing, and trading. Of course, without the bureaucracy that involves the traditional financial system.
Sure, anybody that already knows about crypto has heard that the creation of Bitcoin itself was linked to a promise of a decentralized and inclusive financial system, but it is known that those promises were dismissed by different obstacles.
Hence, in 2014, MakerDAO, which is considered the first decentralized platform, was created. Nonetheless, the DeFi adoption was very limited, but thanks to the development of other protocols and dApps, in 2020 the transactions made through smart contracts went from moving 1 billion dollars to more than 15 billion, and in May of 2021 reached the historic figure of 20 billion dollars.
How does DeFi work?
Definitely, blockchain is the soul of DeFi, so it is necessary to get the basic knowledge about blockchain to understand how DeFi works.
Blockchain is a decentralized and distributed public ledger where all the data and transactions are recorded without a central server, providing a safe network to anyone that wants to operate on it. That’s why blockchain is the core technology to guarantee a new brand decentralized financial system.
In addition, DeFi is ruled by smart contracts, which run automatically when predetermined conditions established by the parties are met.
This is why the data of all parties are safe and anybody using a DeFi application can have full access to a copy of the public ledger. At the same time, there is no need for middlemen or gatekeepers to manage the system and all the parties involved have the warranty that their requirements will be fulfilled. The most popular blockchains on DeFi are Ethereum and Celo.
Advantages of DeFi
Why should you choose DeFi if they provide the same elements that the traditional financial system does? How could this new ecosystem be a game changer for your finances?. Well, let’s introduce you to the advantages that would make you love DeFi.
- A new level of accessibility: Basically, anybody with an internet connection can have access to DeFi, so you don’t need a government-issued ID or any other document.
- Accelerates the financial process: Because there is no need for middlemen or gatekeepers, smart contracts help to automatize the transactions. Complex transactions can be accomplished faster than in the traditional financial system.
- Scalability: DeFi is built with open code, so users can improve the ecosystem when needed, which contributes to accelerating evolution and make finance highly adaptive to the users needs.
- Avoid corruption and bureaucracy: The orders and transactions are executed when they fulfill the parameters established in the smart contracts, and the source code is auditable, which avoids unnecessary bureaucracy and makes corruption inside the system almost impossible.
- Promote financial inclusion: There are a lot of people excluded from the current banking system, due to the lack of documentation, a bad economic situation, or because they live in remote areas, thanks to DeFi those people now have the option to access loans and several financial tools backed by crypto assets.
- High-security standards: While most banks are highly digitalized, their structure remains off-software, meanwhile DeFi is built entirely in a cryptographic network, which provides higher security levels.
- Users’ needs are prioritized: In DeFi there are no centralized institutions controlling interest rates or exclusive lenders earning a percentage of every financial and banking transaction as profit, so the development of the entire ecosystem is based on the needs of all the peers.
Could DeFi defeat the traditional financial system?
In the end, everything depends on how the users drive the massive adoption and the bank’s ability to adapt their obsolete and unfair system, which is already looking for alternatives to implement certain elements from DeFi.
Despite the threats, there are strong reasons to believe that the banking system today could be replaced by one entirely new decentralized system based on cryptographic technology.
Advocates of DeFi assert that the absence of human intermediation and the use of decentralized blockchain makes financial transactions cheaper, letting consumers have more power over how to use their money and how the financial system works.
In addition, that new ecosystem would lead to a world where investments are democratized, thanks to the easy access to tools that for years were available only to a few people.
Furthermore, there would be no possibility of discrimination, because anybody can make transactions anonymously, no matter their gender, skin color, economic status, or nationality.
So, beyond fatalist visions, there is a high probability to consider DeFi as the future of finance and a solid option that would force today’s banking system to evolve into a more inclusive and decentralized system. Making a reality the original promise of Bitcoin: Building a system where people have more power over their finances, without the need for middlemen or gatekeepers.
How to use DeFi?
The advantages are very clear, so probably you want to know how to be part of DeFi. Nowadays dApps and decentralized protocols are used to provide flash loans, stablecoins, P2P marketplaces, e-wallets, and traditional financial transactions.
So, if you get access to any of those tools, you are already part of the DeFi ecosystem. If not, we have good news! Starting your path on decentralized finance is easier than opening a bank account, you only need access to the internet and create a wallet, where you will save the received tokens.
Mostly, it’s possible to buy crypto assets using fiat money such as Dollars and Euros, but you need to know that it is not so easy to find peers that accept less popular fiat such as Bolivares, Pesos, and more.
As a matter of fact, you will need to keep certain security measures. For example, you can’t lose your private key, because it is a unique code that provides access to the owner of the wallet. Also, you should know that there are risks linked to the lack of consumer protection law and the anonymity of both parties.
If you want to buy stablecoins or other cryptocurrencies, and at the same time have the warranty of a platform that minimizes the risks in P2P transactions, we recommend you use apps like El Dorado, which has been built around the DeFi ecosystem, where you can buy cryptocurrencies using your local payment method, even if you are in Latin America.
Would you like to join El Dorado? Sign up, verify your account and start buying and selling cryptocurrencies through our P2P, which is leveraged with blockchain technology provided by Celo.