Decentralized Finance Changes the Global Financial Structure

3 min readAug 4, 2021

What is Decentralized Finance?

DeFi or Decentralized Finance applications don’t rely on centralized authorities like banks. However, they use blockchain-based smart contracts to execute transactions. The goal is to recreate the long-established financial systems, such as exchanges and banks with cryptocurrency. The majority of these applications are run on the Ethereum blockchain. People who participate in Decentralized applications find that transactions are more accessible, efficient, and cost-effective.

How it works

DeFi applications operate without a central service exercising control over the entire system. Financial products become available on a public decentralized blockchain network that is open to anyone to use and eliminates the middleman like brokerages and banks. Furthermore, a government ID, proof of address, bank or brokerage account, or social security number are not necessary to make use of Decentralized Finance.

The DeFi is a system by which software written on the blockchain creates the means for buyers, sellers, borrowers, and lenders to interconnect peer to peer or with a software-based middleman.

Different ways people are engaging with DeFi

Instantly obtain a loan without the need for filling in paperwork — includes short-term or ‘flash loans’ that traditional financial institutions don’t offer
Lend out cryptocurrency and earn interest and rewards
Buy derivatives — long and short bets on the cryptocurrency market
Make peer to peer trades of crypto assets — without the need of a broker
Crypto saving accounts alternatives that earn better interest rates than traditional banking institutions

With the help of Decentralized Finance you can lend out cryptocurrency just like a traditional bank does with the standard fiat currency, this will allow you to earn interest as a lender. The most common use cases of DeFi applications are borrowing and lending but there are plenty other more complex options available too, such as being a liquidity provider to a DEX (decentralized exchange)

The interest rates are far more competitive than what you would find with traditional banks and the barriers that plagued people from entering these options are far less than the traditional system. In short, the only requirement to take out a decentralized loan is the ability to provide collateral with other crypto assets. Furthermore, you can also offer NFT’s as collateral depending on the decentralized protocol used.

It should be noted that these factors contribute to the peril of decentralized finance as opposed to a traditional bank.

How risky is Decentralized Finance

You should know that every decentralized finance protocol and project possesses its own risk and various levels of reward. The reason people see high yield with DeFi is because there is a high risk. There are three major risks that you should be aware of: asset risk, product risk, and technology risk.

Furthermore, there is no regulation or insurance on your money like you get with regular banks. This is why experts say you must only invest what you can afford and recommend you to do thorough research before buying in.