You may have already heard of DeFi (Decentralized Finance), in French: decentralized finance. But what is it exactly? And what are its characteristics?
This helps reduce costs and increases the speed and fluidity of the financial system. In addition, DeFi is open to everyone regardless of age, background, and wealth, as it is accessible to anyone with an internet connection.
This alternative option is made possible thanks to tools like blockchain, so technology becomes the trusted third party in this system.
Characteristics of DeFi:
DeFi runs mostly on the Ethereum protocol and uses protocols and decentralized applications called: dApps.
These protocols are open source and cannot be modified by a central authority.
Once the code is protected by decentralization, it uses smart contracts (small, fully automated programs) that make it possible to establish complex and irreversible agreements between different people.
This system is robust, transparent, and accessible, as well as interoperable with other smart contracts and other decentralized applications.
Usage examples:
Decentralized borrowing: granting loans without conditions is out of the question, which is why protocols use the principle of collateral. For every amount borrowed in crypto-assets, it is necessary to provide 1.5 times the borrowed amount as collateral, also in crypto-assets.
This allows you to invest in crypto-assets for the long term and then use this value by «locking» it as collateral to obtain a smaller loan. The borrowed value can be used for a second investment or injected into the traditional economy. In order to «unlock» the collateral, you must obviously repay your loan as well as fees. You can close your loan at any time.
Decentralized lending: if you have crypto-assets and want to put them to work to earn a small extra yield, you can deposit them into a «liquidity pool.» This pool gathers the crypto-assets of all lenders and allows borrowers to access the liquidity after locking up their collateral.
Thus, the liquidity pool generates fees paid by borrowers, which fuel the lenders' yield!
The crypto-asset lender can withdraw these funds at any time with interest.
Borrowings as well as loans can be made in stablecoin and/or in volatile crypto-assets.
