What is DeFi?

DeFi stands for Decentralized Finance. Let us look at this term from the perspective of economy. Well, the traditional market offering financial services remains centralized. This, in turn, means that there are entities behind the given institutions that have control over them.

An example of such centralized financial organizations may be banks, for example. By entrusting them with our resources, we depend on such institutions. The people behind them can freeze our account at any time. We have no real influence over what happens to our money in a crisis situation. Following this lead, we can come to the conclusion that traditional financial systems function on the basis of the strength and stability of large institutions and governments that regulate them. If a bank collapses or the authorities fail to meet their obligations, then the entire system can be destroyed. An example is hyperinflation in Venezuela, to which mismanagement has contributed.

The solution to the problems behind centralisation is a kind of decentralisation. In this case, DeFi can play a key role. Decentralized finances include digital assets as well as smart contracts or blockchain-based dApps.

Speaking of DeFi, one can imagine an open financial ecosystem in which tools and services are decentralized. Since these are applications built on a given chain of blocks such as Ethereum, they can be modified, merged and integrated according to their own needs.

Speaking of DeFi, its applications are also worth mentioning. I will now list a few that just come to my mind

Creation and implementation of smart contracts

Most potential DeFi applications focus on creating and concluding smart contracts. When a traditional contract uses legal terminology to define the terms of an agreement between two parties, in the case of an intelligent contract the code enforces the law. This means that business processes can be automated. This eliminates the need for physical supervision.

Building decentralized markets

One of the applications of DeFi are decentralized exchanges (DEX). How do such platforms differ from those centralized - managed by companies? Well, in this case users do not use the services of intermediaries. All transactions run directly between their portfolios, using intelligent contracts.

Lending
Comparing traditional credit systems with decentralised ones, the latter have much more advantages if we look at them from the consumer's side. First of all, they have immediate settlements, the possibility of using digital assets as collateral, and there is no credit control here. Markets based on blockchain minimize counterparty risk. Loans become cheaper and faster, and therefore they are also available to a larger group of people.

Banking services

Since DeFi in itself means financial services, they can also be used in banking. How? Well, in this case, it involves the emission of stablecoins. Their value should not, in principle, be as variable as in the case of Bitcoin. They retain coverage in traditional currencies or raw materials such as gold, for example.

DeFi can also solve the problem of expensive and time-consuming mortgages. All this by eliminating the intermediaries who would be involved in the process. Using smart contracts, you can reduce fees.

DeFi or Decentralized Finance is a concept that assumes the possibility of transferring any currently available financial service such as saving, lending, trading or insurance to blockchain. And all this can be done without the participation of banks and other intermediaries.

This is possible thanks to the use of blockchain offering smart contracts, i.e. programs that start automatically when certain conditions are met. One of the most popular blockchain of this type is Ethereum, operating since 2015, where hundreds of decentralised aplications (daaps) offering smart contract services have been developed.

People's imagination got hot when it turned out that two completely strangers from different parts of the world can negotiate a loan without the participation of a bank and this in a way fully secured by blockchain.

DeFi offers several advantages over traditional finance:

• It does not require the participation of intermediaries like banks. Smart contracts can be agreed and executed directly between users
• the source code of many blockchain offering smart contract services is public and accessible to everyone, which also means transparency of transactions made on such blockchain
• Decentralized applications are global in scope and it does not matter if someone lives in USA or in the Ivory Coast.
• Freedom in creating decentralized applications, everyone can create them on their own terms

DeFi is a promising trend but also has its drawbacks:

• Crypto and related technology is not legal in every country
• Cryptocurrencies industry is often not regulated by any official institutions, which can be both an advantage when we want to make transactions without intermediaries but also a disadvantage, because in case of recovery problems there is no one to turn to for help.
• DeFi projects depend on the price of the token
• the crypto industry is vulnerable to hacking and fraud
• significant risk of loss of funds related to yield farming
• possibility of errors and gaps in the system
• DeFi makes some people red-hot because of the possibility of quick profit and that is why it has become so popular. However, let's remember that fast profits can turn into big losses even faster, whether caused by mistakes or premeditated actions: hackers, scammers or financial pyramid makers.

Guys told you what i DeFi, but it's nothing without DEXs. 

Decentralised exchanges such as Uniswap and Kyber Network enable you to trade while retaining full control over your crypto. At the heart of these systems are users like yourself or me. They place their crypto  in so-called "pools", strictly described by the code guidelines contained in smart contracts. They become Liquidity Providers or LPs (Liquidity Provider - DeFi is full of new terminology, so it's worthwhile to focus a little bit).

Let's assume that we want to trade the ETH/USDT pair on the decentralized Uniswap exchange. First, LP deposits its ETHs and USDTs - both in 50/50 proportions - in the appropriate field. If you make any transaction on this pair, you pay a small fee to the liquidity provider. It is from this fee that LPs earn money. Interestingly, anyone can provide liquidity and generate passive income on their crypto. What is the risk you take? It is usually referred to as the risk of a smart contract - that is, that everything will go to hell and Uniswap will show critical errors in the code.