DeFi Explained

Economies around the world need financial instruments to develop themselves. As pointed out by the great economist Joseph Schumpeter, without credit in an economy, there is no growth or development. Traditionally, these instruments come from intermediaries, like banks and governments.

Traditional intermediaries are inside the Traditional Finance (TradFi) sector. The cryptomarket also has Centralized Finance (CeFi) and Decentralized Finance (DeFi).

CeFi includes, among other things, stablecoins created by companies (e.g. USDC) and Centralized [Crypto] Exchanges, also known as CEXs (e.g. Binance and Coinbase). In other words, CeFi is a cryptomarket sector where centralized companies have control over the financial instruments.

DeFi is different, because it is a sector where financial objects are provided by individuals on a protocol in a decentralized manner. DeFi includes, among other things, decentralized stablecoins (e.g. DAI), Decentralized [Crypto] Exchanges (e.g. Uniswap and Pancakeswap), also known as DEXs, and lending platforms (e.g. Aave).

So, unlike the others, in the DeFi sector, you hold your own money, control where it goes and how it is spent and transfer money or assets quickly (with no need for the approval of a centralized third party). Also, one can do this anytime, because the sector does not have a specific time to operate. Different from a bank, for example, in DeFi, generally speaking, we can see all the transactions behind a wallet or a pseudonym.

The most important thing in DeFi is the abscence of usage restriction. Recently, for example, we saw a growth in usage in authoritarian and totalitarian countries or just countries that can’t manage their financials, which has a huge bad impact on the life of citizens. So, DeFi also plays a role in the well-being of individuals.

Summarizing, DeFi means more access to financial instruments, liquidity, transaction speed, transparency, efficiency, productivity and less necessity for third parties.

The importance of DeFi is not only about economic growth and development (which will help more when it becomes more solid), but this sector is the representation of what the cryptomarket aims as the most important thing: individual sovereignty.

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Article by Daniel Ascen