Many financial experts are pointing fingers at the complications in the current baking system. Furthermore, the lack of transparency influences the judgement of the people regarding the legacy model. Decentralized finance technology projects are offering newer solutions that could attract the unbanked population of the world.
Today’s Centralized FinanceÂ
- Every aspect of banking, lending and trading is managed by centralized systems.
- Middleman (Bank) earns a percentage of every financial and banking transaction as profit. We all have to pay to play.
- Assets are property, gold etc.
Why we need DeFi???
We will learn through example!
DeFi takes away work done by banks, exchanges and insurers today—like lending, borrowing and trading—and puts it in the hands of regular people.
Today, we might put our savings in an online saving account and earn a 0.5% interest rate on our money. The bank then turns around and lends that money to another customer at 3% interest and pockets the 2.5% profit. With DeFi, people lend their savings directly to others, and earn the full 3% return on their money.
 KYT instead of KYC
KYC guidelines often contradict with the privacy efforts. DeFi answers this issue with a newer concept called — Know-Your-Transaction (KYT) mechanism. This mechanism suggests that the decentralized infrastructure would focus on transaction behaviours digital addresses rather than the identity of the users.
Aim of DeFi:
- To democratize finance.
- Replacing legacy centralized institutions with peer-to-peer relationships.
- Provide a full spectrum of financial services through decentralized system.
- Giving benefits for 24/7, instantaneous service with very low to no cost.
Pillars of DeFi:
- Cryptocurrencies: DeFi applications are totally depends on crypto world.
- Blockchain Technology: blockchain technology have very significant role in enabling DeFi platforms.
- Smart Contracts: smart contract have significance in automating financial transactions within DeFi ecosystems.
Main offered service by DeFi: Lending and Borrowing
Current CeFi totally depends on these two words, individual can borrow money with some collateral, sometime that interest rate of repayment is terribly high.
Also individual can lend money to the bank with intention to earn some money again earning interest rate is too low.
Both the above problems are solved by DeFi !
Here inter mediator are Smart contract that giving 100% transparency assurance and whatever profit generated is totally of investors.
If a person wants to earn some interest on his crypto holdings, they can simply go to AAVE – the biggest crypto lending platform – and deposit their funds into a smart contract. In return, they get specific tokens that are equivalent to their original deposit, plus the interest.
The biggest difference between Compound Finance and a savings account in a bank is that lenders get tokens representing their deposits and the interest earned ––like a derivative of their assets. These instruments are called cTokens ––These tokens can in turn be used as collateral to borrow against or sold for other cryptocurrencies.
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Some possibilities with DeFi:
DEX(Decentralized Exchange):
Just take an example of forex trading on any Centralized exchange(e.g.wazirX, coinbase, Gemini),
Transaction fees are vary with respect to many factor like exchange fees as per personal interest etc.
But here everything, including the trading fee, is pre-determined and written into the code so that it can never be altered. You can comfortably trade your funds by paying just a minimal fee, usually <1%.
Flash Loans
Flash loan is a pretty novel concept where an individual takes a hefty loan to purchase an asset from an exchange and sell it on another platform to earn profit, and then return the loan while keeping the profits. The entire process is completed in a seconds. Flash loans help the DeFi space improve the price stability for different digital commodities and strengthen the crypto-economic structure.
Insurances
Crypto insurance works pretty much the same way as real-world insurance policies. They help you recover your losses by offering you monetary compensation, and in return, you pay them a fee. But the difference is, unlike regular insurance firms where people calculate and assess the risk, everything is done by Smart Contract for DeFi insurance.
Examples of Decentralize exchange
Compound Finance
Financial protocols  released in September 2018, created a market for borrowers taking out collateralized loans, and lenders to rake in interest rates paid by those borrowers.
Uniswap
It launched in November 2018, allowed users to seamlessly and permissionlessly swap any token on Ethereum.
It’s one of the first DEXs to pioneer the automated market maker system, which allows traders to swap tokens without relying on an order book. i.e. Instantly.
Curve Finance
Curve Finance is a decentralized exchange focusing on stablecoins, and launched in January 2020. Curve uses liquidity pools like Uniswap.
Balancer
Balancer is both an asset manager and a decentralized exchange built on the Ethereum network, and founded in March 2020.
Synthetix
Synthetix is a protocol for minting and trading synthetic assets on Ethereum, and founded in February 2019.
Yearn finance
Yearn Finance is a lending aggregator, known as a yield bouncer, which optimizes users’ deposits by routing them to lending and liquidity pools offering the most yield. It uses protocols including Compound, Dydx and Curve Finance, and founded in February 2020.
Yam Finance
Yam Finance is a project designed to reward users with YAM tokens in exchange for their deposits of cryptocurrency into different liquidity pools, and founded in August of 2020 by a group of cryptocurrency developers
 Risks associated with DeFi?
Technology risk– DeFi is an application, a software, meaning it can have bugs or loopholes in the code.
E.g. YAM code bug disaster
Liquidity risk: As every small quantity of buying or selling of crypto assets, may have a huge impact on their value.
 Product risk: Any product or service you engage with, it is important to engage with a reputable, transparent product. Anyone can create a cryptocurrency or a DeFi application, thus, it can be difficult to parse through what is serious and what is a joke.
E.g.
- Meme coins go viral one day, skyrocketing its value and then disappear the next.
- The Terra (Luna) fiasco is an example of a DeFi without economic sustainability.
Final words:
DeFi is focused on building decentralized applications that make it easier for people to use their money without relying on a third party. Really DeFi is an active transformation that is taking place and reshaping the future of finance.