DeFi is the abbreviation of Decentralized Finance, which usually refers to decentralized applications (DApps) composed of financial smart contracts based on Ethereum. Simply put, it is financial software built on the blockchain that can be combined with each other like Lego blocks.

Over the years, computers have upended nearly every industry. Digital products and services are becoming increasingly complex through constant iterative innovation. We have transformed the world with computer technology to meet our needs. From digital assistants to smart homes, automated procedures now affect every aspect of people's daily lives. So how can money be any different?

What is Decentralized Finance?

To better understand DeFi, we should first look at how traditional finance came about. Money is often thought of as something that's always been around, but it's not.

Humans originally exchanged goods and services for value. But as societies formed and developed, we invented money, a more convenient way of exchanging value. The currency then helped drive new innovations and productivity advancements. Progress has not come without a price, however.

What is the current financial situation? You would convert the value you earned for your hard work into government-issued currency and deposit it in a bank. You trust the government not to print more money overnight, and you trust the bank to keep your money safe. When it comes to investing, you entrust your assets to a financial advisor. By giving your money to others, you hope to make a profit. But the sad truth of our current financial system is that the trust we put in doesn’t always pay off accordingly.

We often have little say in how banks/corporates handle our investments, or even how governments manage the economy. In most cases, investors only get a small percentage of the return on the investment profits of their own funds.

Also, in finance, the world is not flat. The financial markets of various countries cannot flow normally. Take the bank interest rate as an example, you know? The annual interest rate of Japanese bank deposits is 0.07%, and the annual interest rate of loans is only 1.475%, while the annual interest rate of Indian bank loans is as high as 8.6%. So can Japanese lend money to Indians with more than 5% interest? This is good for both parties. But sorry, traditional finance doesn't allow you to do that. Besides, can someone from another country really lend money to an unknown Indian?

1. DeFi is trying to build something different

   Decentralized finance aims to create a financial system that is open to all and minimizes the need for one person to trust and rely on a central government. Technologies such as the internet, cryptography, and blockchain give us the tools to build and control financial systems, eliminating the need for a central authority.

There is a well-known saying in the blockchain world: "Don't trust, verify." Because with a blockchain network, you as an individual can verify any transaction that occurs on the blockchain.

2.

DeFi allows everyone to take charge of their finances Almost all DeFi applications are based on the Ethereum blockchain, the most popular programmable blockchain in the world. Ethereum is a blockchain network that maintains a shared digital ledger of value.

Developers write applications on Ethereum that can create, store and manage digital assets (also known as tokens) on the blockchain. These programs are called smart contracts or decentralized applications (DApps). They are contracts or agreements enforced by the Ethereum blockchain. You can build complex, irreversible agreements without the need for notaries, supervisors.

Decentralized finance has the opportunity to enable a more resilient and transparent financial system. Anyone with an internet connection can access and interact with smart contracts based on the Ethereum blockchain. Trusted smart contracts are open source and can call each other with other smart contracts. Thus, users can verify the code of the smart contract and choose the service that best suits them.

3.

What are some examples of popular DeFi applications? There are many different DeFi products and services, some of which may feel familiar to you, much like existing financial services, but with a decentralized character.

Currently, the most popular and fastest growing type of DeFi is lending platforms. Similar to a bank, users deposit funds and earn interest on their assets borrowed from other users. In this case, however, the asset is digitized and the smart contract connects the lender with the borrower, enforces the loan terms and distributes the interest. This all happens without the need for mutual trust or the existence of an intermediary bank. And, by cutting out middlemen and geographic constraints, lenders can earn higher returns and, thanks to the transparency of the blockchain, gain a clearer picture of risk.

There is also a class of tokens known as stablecoins that are also important to the DeFi ecosystem. You might think that the prices of all cryptocurrencies fluctuate frequently. However, a stablecoin is a token designed to have a fixed value, usually pegged to a fiat currency such as the U.S. dollar. For example, DAI is a stablecoin pegged 1:1 to the U.S. dollar and backed by ether (ETH). For every DAI produced, $1.50 worth of ETH is locked in the MakerDAO smart contract as collateral.

Another popular DeFi application is the so-called decentralized exchange, or DEX for short. It uses smart contracts to enforce transaction rules, execute transactions, and securely process funds. When you trade with a DEX, there are no exchange operators, no registration, no authentication or withdrawal fees.

4.

DeFi can break the financial market breakthrough between countries DeFi application smears any combination, based on blockchain and contracts, you can safely give money to someone in a world market, no matter who he is, and borrow it. Through the huge gains in between, and greatly reduce the popularity of traditional finance.

5.

DeFi can make money put together like Lego bricks With Lego bricks, you can start with a bunch of small bricks. Feel free to piece together what you want. The same goes for smart contracts. By piecing together the existing components of DeFi, you can combine, modify or create powerful financial instruments on demand.

Compound's cDAI, for example, is a perfect example of money Lego. When you deposit DAI to Compound, you receive cDAI tokens, which are used to record the DAI you deposited and any interest earned through the loan. Since cDAI is a token, you can send, receive and even use cDAI in other smart contracts. This is a typical pattern of funding Lego: ETH goes into MakerDAO to mint DAI tokens, DAI is supplied to Compound in exchange for cDAI, and cDAI tokens can be reused for other DApps.

6.

DeFi has different decentralization needs Because it is fundamentally different, decentralization where everything can or needs to be applied.

As mentioned earlier, stablecoins are very Chinese and English. However, not all stablecoins are as distributable as DAI. Which is actually a token in a token like a DeFi token, and for every USDC coin, a certain bank has a $1 deposit somewhere. You can tokenize "real-world assets" in a fixed center, and at the same time, this is a completely decentralized thing, because at this point you can trade, send and receive these tokens on the blockchain, But the need to physically manage or replace world assets cannot be completely eliminated.

For example, buying a house on the blockchain. Suppose someone tokenizes their home as a token, puts the token on a decentralized exchange, and then you buy it. Without the corresponding legal setup and laws, even if you own the token, you cannot easily force the person to move out of the house. As it stands, you will need to go back to the courts in your home country to resolve the dispute.

In short, the technology has limitations, and the boundaries of DeFi are starting to blur. It is certain that in the future, the law will adapt to the ever-evolving form of finance, and the place of DeFi in the world will become clearer. At least for now, there is one clear fact: DeFi exists and will continue to grow.

This time I will talk about it first, friends who like defi can go to Telegram to add me; @MC0MC0, +852 6200 8947