More and more people are deciding to enter the world of decentralized finance. However, for those not familiar with the subject, it can be difficult to understand due to the differences from the traditional system. 
<h2>What is Decentralized Finance?</h2>
Decentralized finance (DeFi) is an ecosystem that allows users to use different financial products and services. With this financial system, you can carry out a currency exchange operation, take out a loan, carry out placement, and take out insurance. Therefore, it is different from the traditional financial system.

There is no central counterparty, and it works on blockchain technology. El País explained this to Martín Larzabal, director of Cryptotrust Fiduciary. DeFi applications create Financial services and products (known as <a href="https://www.cryptoknowmics.com/news/defi-dapps-demand-rises-among-users">DApps</a>) with a foundation on the blockchain. The most widely used is Ethereum, although there are others such as Solana and Cardano, he added.

Decentralized finance uses smart contracts, which "are written in code. They allow two counterparties to set the conditions of a transaction. They do this without the need to trust a third party to execute it," he said.

Also, there are no "names," and you do not need someone to authorize you to open an account. But, yes, interacting requires a virtual wallet and usually requires placing the money in the smart contract.

How can you know the size of decentralized finance? Larzabal said that the amount of money housed in smart contracts is on the <a href="https://defipulse.com/">DeFi Pulse website</a>. He pointed out that at the beginning of 2019, the figure did not even reach $300 million. However, at the beginning of 2020, it was already $1,000 million, and now it is at over $107,000 million.

<img class="aligncenter" src="https://radarr.africa/wp-content/uploads/2021/03/The-Future-of-Decentralized-Finance-DeFi-in-Africa.jpg" alt="What Makes Decentralized Finance The Biggest Thing In The World?" width="574" height="323" />
<h2>Decentralized Finance and Stablecoins</h2>
Stablecoins are cryptocurrencies that have the backing of stable assets and therefore suffer from less volatility than, for example, Bitcoin. Larzabal said that they play a very important role in decentralized finance. Furthermore, the most traded are those backed by the dollar with a one-to-one parity.

The International Monetary Fund (IMF) warned in October 2021 that the term 'stablecoin' can "generate confusion given the differences between the types of guarantees and the quality of credit, as well as between price stabilization mechanisms."

It also noted in the "Global Financial Stability Report" that "stablecoin regulation varies substantially by jurisdiction. This raises concerns about regulatory loopholes, inconsistency in regulatory treatment, and regulatory arbitrage." 
<h2>Decentralized Finance Options</h2>
As mentioned above, a wide spectrum of things can be done in decentralized finance. One of the options is to resort to a lending platform. Here, you can lend different digital assets, each with a specific interest rate, Larzabal explained. At the same time, he clarified that there is no exchange of physical dollars but stablecoins attached to them.

You can take a loan or make money available for someone else under certain conditions. For example, the director of Cryptotrust Fiduciary pointed out that if a person wants to "put his money to work," he can convert it into a stablecoin or a cryptocurrency. In exchange, he will get a passive interest rate.

Likewise, he explained that whoever takes the money pays an active interest rate with an over-collateralization of the credit. On the other hand, there are decentralized exchange platforms where you can trade digital assets. Larzabal expressed that "if you want to put money to work, you can contribute with buying and selling points in exchange for a percentage of the fees that exchanges operate and, in turn, can give you protocol tokens."
<h2>Pros and Cons Of Decentralized Finance</h2>
One of the advantages is that with the smart contract, although there is no central counterparty to ensure compliance, it undergoes execution, and no one can change it, Larzabal explained. 

In addition, he understands that this immutability gives him great strength and avoids manipulation. So, for example, a person cannot go and change the interest rate on a loan. The director also stressed that it is transparent and that if someone makes a change, everyone will be able to see it. 

There are also disadvantages. Contracts are immutable, and, at the same time, human beings who can make mistakes write them. In other instances where a vulnerability pops up, he said the community can agree to change the code to resolve the issue.

Also, the fact that it is auditable has its flip side. The director of Cryptotrust Fiduciary pointed out that any user can study it. This includes hackers who can look for vulnerabilities to, for example, try to steal the funds that the smart contract has.

Finally, he commented that when there are a lot of operations in the applications, there is a possibility that a bottleneck can emerge that makes the transaction slower. However, according to him, there are ongoing changes to ensure that it does not happen in the future.
<h2>What Makes DeFi The Biggest Thing In The World?</h2>
Blockchain finances are born from the promise of creating an alternative to the traditional financial market, where institutions and arbitrations ruled by courts guard money. The intermediary figure is a fundamental piece in the functioning of traditional finances. So, users need to trust them when using the services. However, this exposes you to risks of censorship, embezzlement, and high-interest rates.

The idea of ​​the DeFi ecosystem, starting with proposals such as Bitcoin, is to eliminate the figure of the intermediary. As a result, it provides greater security and efficiency to its users, as Satoshi Nakamoto explained in the Bitcoin whitepaper. 

Each individual has control over their funds and is responsible for securing and managing them at their convenience. The introduction of programmed finance, executed by code, increases transparency, decreases the possibilities of censorship, and limits the power of institutions. In this way, there is a promise of greater economic independence and a less manipulable market.

The DeFi ecosystem also describes itself as an easily accessible market. The concept of "open finance" proposes to reduce the requirements to opt for one of these services in the traditional market. For example, to access a loan in DeFi, it is unnecessary to have a bank account or own large amounts of money (or properties in your name). 

Likewise, many of these services propose to protect their users' privacy. So, it is not necessary to enter personal data to be able to use these platforms. This makes it possible for people of any economic status, nationality, belief, or political position to access financial products.

Since there is no need for a third party, DeFi applications also become global financial services and are less expensive than traditional ones. Users can borrow and trade cryptocurrencies under a market supply and demand fee schedule. 
<h2>Conclusion</h2>
Cryptocurrencies have brought about a change in the functioning of money as we know it. It goes from the need for trusted third parties to determine the prices and what is achievable with the money to a decentralized system where the community determines the price and can do what it wants.

DeFi now proposes to take this one step further to bring the different elements of the conventional banking system into a fully digital and decentralized environment. In addition, they seek to offer disruptive solutions that simplify traditional banking processes. All this eliminates the need for trusted third parties, removes the additional costs of the conventional banking system, reduces management times, and decreases tedious bureaucracy.

What Makes Decentralized Finance The Biggest Thing In The World?

Decentralized finance (DeFi) is an ecosystem that allows users to use different financial products and services without the need for a central counterparty

Oluwademilade Afolabi is a freelance writer and editor passionate about blockchain technology and the health industry. He is a 6th year medical student, and has worked with various companies and blogs since the blockchain revolution began.

What Makes Decentralized Finance The Biggest Thing In The World?

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