What is Decentralized Finance (DeFi), what are its capabilities, advantages and disadvantages?
DeFi is a blockchain-based financial services and application platform. It is a promising alternative to the traditional financial and banking system. The main feature of DeFi is decentralization, thanks to which any Internet user gets ample opportunities for managing cryptocurrency assets, investing and lending them. The main tools of the system are decentralized (dApps) and peer-to-peer (P2P) applications.
The DeFi ecosystem does not imply the presence of regulatory authorities and is self-regulatory – the rules and obligations of the parties are specified in smart contracts. The open source code of its applications and services allows anyone to study and verify them, transactions in the system are open to all users.
DeFi smart contracts can be created by each member, it does not require any special permissions or statuses. Stablecoins are one of the most popular ecosystem products. These are special cryptocurrencies, the value of which is tied to global financial assets (US dollar, euro, gold, etc.), which ensures the stability of their exchange rate.
DeFi applications are also actively used for P2P lending, namely for creating non-custodian landing protocols. This technology helps users to issue and receive loans directly, without the participation of an intermediary guarantor, while protecting them from possible risks and reducing transaction fees.
There are some other products in the DeFi ecosystem include prediction markets, synthetic assets, tokenized securities platforms, and escrow and asset management services.
DeFi has not only advantages, but also disadvantages, for example, these are credit and liquidity risks, as well as the high volatility of cryptocurrency assets. Some smart contracts may not be hack resistant, and due to vague responsibility, users do not risk investing large sums in DeFi platforms yet.