What is DeFi? Ferruh Danacı/AztecGoldHero, who has been producing content on blockchain, cryptocurrencies and crypto money exchanges since 2013, explained one of the most curious subjects in the crypto world in a simple way!
What is DeFi?
It can be said that over the years traditional finance has evolved enough to offer us many innovative services, but all of them are supported by central authorities. Literally, DeFi = Decentral Finance
Decentralized Finance eliminates middlemen and serves users in various ways, such as facilitating loans. In the normal classical finance and banking sector, the bank and the central bank control the financial value, i.e. money. In blockchain technology, this event is automated by being transferred to the blockchain with DeFis.
In the classical economy, a bank has a Dollar Euro Reserve. You borrow from here or you lend here. The bank takes a commission from you for these transactions, the transaction fee and gives you an extra interest or applies interest.
On the other hand, using DeFi lending protocols, you can use your crypto assets to get loans. Getting these loans is easier and more cost-effective than loans you get from traditional banks.
Lenders and borrowers come together on a DeFi lending platform and execute smart contracts. The borrower places his crypto as collateral and gets a loan from the platform, while the lender gives his fiat money to the platform to earn some interest.
When you apply for a loan with a bank, the bank will check your credit history, perform KYC (know your customer) and look at the value of the collateral, if any.
All these transactions are carried out autonomously with DeFis, completely under your control, without the need for a bank. In the traditional system, banks and central banks create the pool of money you borrow or lend, while in DeFi, users create this pool. You will receive a share of the income of that pool at the rate that you provide liquidity to the pool.
The DeFi system, like banks, gives interest, takes interest, and charges commissions, ie transaction fees, from transactions made just like banks. However, unlike banks, it distributes transaction fees and interest to other users who provide liquidity to the pools, not to itself.
“Person A has $1000 in X Coins. This person adds the $1000 X Coin to the liquid pool in the DeFi system. He starts the system by placing $1000 X Coin and $1000. In this case, the stable interest income is only the transaction fee.
Person B has $500 but no X Coin. Person B Wants to borrow X Coin from system , so he deposit his $500 . Than he can borrow 500 dollar worht of X coin from system. The system cuts the transaction fees of $500 from B for X coins and takes person A X coins and sends them to person B's wallet. Person B now has $0 and $500 X Coins.
Person A now has $500 and $1500 X Coins. In this case, “Dollar Excess” and “Coin Missing” remain in the system.
The system is starting to pay high interest on X Coin for more users to bring coins to the system. Other users with high interest bring X Coins to the system and start to receive both interest and transaction fees.
When the number of X Coins decreases; this time, the system gives more interest to the dollar, while reducing the interest it gives to X Coin.
All of this happens based on smart contracts.
The balance of the pool is adjusted automatically, and all transaction fees and interest income are shared equally by the users who provide liquidity to the DeFi system, in proportion to the size of the liquid they provide…”
In short, you get the transaction fees of the banks!
Although it may seem a bit complicated, the system actually works quite simply. What happens here is that users earn tokens by locking cryptocurrencies in smart contracts running on the exchange's trading platforms. Such applications save the user time and money.
The DeFi protocol essentially means that a crypto owner can collect more crypto tokens using existing tokens. Just like the differences between a centralized exchange and a decentralized exchange, all security risks are with the user, since every transaction is made from wallet to wallet through smart contracts in DeFi. It is useful to remind you, do not forget that your passwords are under your control.
This year seems to be the year the dormant DeFi giant wakes up, as there are more than 100 decentralized exchanges that continue to gain exponentially in value alongside developers developing tools for general use. Among decentralized exchange derivatives, dYdX, Uniswap, Pancakeswap, Waves Exchange can be cited as easily accessible and reliable platforms for everyone.