SecureZero

Decentralized Finance
(DeFi) Introduction
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What is DeFi?
Decentralized Finance (DeFi) is a blockchain-based form of finance that does not rely on a
centralized agency to hold/control our money and make financial decisions. It is a financial
system that is permissionless, transparent, decentralized and trustless. These might be difficult
sentences to fully imagine as for hundreds of years we have never come close to experiencing
such levels of transparency, freedom and fairness. To cut things short, when we have a new
system of financial services (money & the ability to transact, lend, borrow and trade it) which
cannot be controlled by a centralized group of people like governments, banks etc, & is
transparent, bias free. We have DeFi.

How does it work?

Many cryptocurrencies like Bitcoin & Ethereum are not backed by physical commodities or
precious metals like in the case of fiat currencies. But in spite of this, they do have value- value
derived from limited supply, speculative demand and utility. There is also another section of
cryptocurrencies called stable currencies (like USDC, DAI etc) that are minted (created) by
providing a valuable backing. Hence at this state of things, one can say without further debates
that cryptocurrencies do have value, though their means of deriving the value is pretty
unconventional.

With the value established, transacting using cryptocurrencies for some goods/services is easily
imaginable. But you may be wondering how can loans, international transfer, interest rates etc
work especially since there isn’t a central agency keeping track or insuring lended money. All
these are possible due to Smart Contracts, because cryptocurrency is programmable money! For
example, while swapping from one crypto currency to another using a DEX (decentralised
exchange), the smart contract checks if you have enough funds to perform the particular swap
and also makes sure the swapped crypto is automatically sent to your wallet. The same applies
when taking loans, trades etc - the underlying conditions and governance are programmed and
there is no need for trust on an agency to operate.
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Why is DeFi important?

DeFi is important as it starts from the limitations of the conventional financial system. The
present system for example requires a lot of paperwork, permission, time etc before one can
process an international transaction. One also needs to change from a national currency to
another, requires intermediaries, high transaction fees, a lot of confirmations etc. All of these can
be avoided by using cryptocurrencies. Since they are not associated with any country or region,
their value and acceptance is global & and transactions can be done in an instant without heavy
fees, agents in the middle or paperwork.

There are also deeper problems that DeFi addresses like transparency and democracy. Presently,
governments and banks are strictly closed systems which do not have transparency in terms of
what happens with our money or who gets to use it (deposited amounts). This infrastructure has
given rise to many billion dollar scams. Also, the rich, privileged section of the society is treated
with extra efficiency in operation, borrow amounts and flexibility. DeFi erases all these biases
and presents to us a truly fair & transparent way of handling money.

What does DeFi do extra?

Since it is a programmable system its utility and flexibility can extend till the tip of our
imagination. To name a few - there are uncollateralized loans in DeFi, and don’t worry: due to a
set of smart conditions, it works without risk to the lending party. Also, since most platforms in
DeFi (exchanges, pools etc.) are open systems, there are automated DeFi protocols which will
shift your funds between pools to provide the maximum interest rate (most of these DeFi
projects are currently powered by Ethereum Blockchain). And this list of cool features is very
long, we can only imagine how things will be 5 or 10 years down the line.
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Benefits & Disadvantages over Centralized Finance

- Better interest rates on your assets

- Easier & faster transactions

- Accessibility for everyone and 24/7 availability

- A transparent network that can prevent scams

and an imaginative, passionate community of developers launching cooler, better projects

everyday - the ecosystem is thriving without doubt. Surely, the next generations of financially
literate people will have a more efficient financial infrastructure in their hands.

Disadvantages are mainly in the friction the space may experience from banks and govts. This
can scare potential investors and also a large section of the general population from using these
services. Without wider adoption, the growth of the system and interest of community members
may waiver.