Decentralized finance (DeFi)
Decentralized finance is a collective term for new financial services such as savings, loans, mortgages and insurance that use open and free systems. It is also referred to as Open Finance or DeFi.
It is thus not its own technology, but existing technologies such as blockchains and smart contracts are used. They are considered a real threat to traditional banking services and insurance companies.
As it is a free system, everything is also allowed, and no intermediaries exist. There is no one who prevents a loan from being taken out or refuses to insure assets. Of course, freedom can also attract illegal activity, which can also create conflicts in the future.
Of course, banks want to maximize their profits when they help customers - but within DeFi, fees and overheads are regulated in a more advantageous way for the borrower.
The total value locked to DeFi has increased from about $5.2 billion to about $44 billion from the beginning of 2020 to Aug 2020. That is 8.5 times in a little more than six months. There is no indication that it will decrease. On the contrary.
Just as with blockchain technology in general, everyone can participate. Which also includes poorer countries and sections of the population that lack access to banking services. As long as you have a smartphone with an internet connection, there are no obstacles. The current banking system excludes about 40% of the world's population.
There is no special DeFi technology, but smart contracts and blockchains are used. The biggest player today is Ethereum. For the sake of writing, Ethereum 1.0 is used, which means that the number of transactions per second is limited to about 15. It has sometimes been a problem even before DeFi's growth, and now the problems are more clearly felt than ever.
To help them, they therefore use various layer-2 solutions that take the calculation cost from the blockchain, usually without the decentralization suffering. You are also waiting for Ethereum 2.0, which will provide enough transactions per second to keep transaction fees low and that the waiting time does not interfere.
The most common area of use for DeFi is loans and interest rates. Since it is not possible to guarantee that the borrower will repay the money, the borrower must pledge something that is as valuable as the loan. This is usually done with stablecoins. What, then, is the purpose of this?
It is usually about wanting quick money, perhaps for new investments, without having to sell. Say you want to use the value of your Monero, but do not sell them if they suddenly increase in value. Then you can lend Monero to others, and pay with, for example, USDT (Tether), and thus get a percentage profit.
It is a market with great growth, so this may change quickly. If you want more statistics and information about the DeFi space right now, you can check out DeFi Pulse.