In recent years, cryptocurrencies have provided a novel platform to facilitate financial affairs and eliminate unnecessary intermediaries in this domain. DeFi, taking a step further, aims to create a comprehensive and complete transformation in the traditional financial system. Imagine a world where financial transactions are conducted without the need for any intermediaries, banks, or traditional financial institutions. A place where borrowing is no longer monopolized by banks, and tedious administrative processes and paperwork are completely eliminated. A world where the financial limitations imposed by centralized systems no longer exist, providing a free and intermediary-free platform for all your financial activities. This intermediary-free world is the ultimate goal of the DeFi sector.

What is DeFi?

DeFi (short for Decentralized Finance) represents a groundbreaking evolution in the financial sector that, by eliminating intermediaries and relying on the power of blockchain and smart contracts, directly provides financial services between individuals.

In traditional financial systems, banks and centralized institutions act as intermediaries in transactions, effectively holding control and oversight over financial affairs. This not only incurs additional fees but can also lead to bureaucracy and slow processes.

However, DeFi, leveraging blockchain technology, removes these intermediaries and facilitates direct interactions between individuals in financial transactions. In this system, smart contracts, which are self-executing programs on the blockchain, are responsible for carrying out transactions according to predetermined conditions.

Centralized vs. Decentralized Finance

In centralized financial systems, a country's financial markets are under the full control and management of government authorities and the central bank. In this model, all financial decisions and transactions are carried out through centralized entities. However, in today's world, decentralized finance (DeFi) has created conditions where traditional financial systems and the role of governments become less prominent. This innovation allows investors to independently and directly manage their assets without reliance on the government and the central bank. This model of financial services is known as decentralized finance or DeFi.

DeFi utilizes blockchain technology, which is the underlying technology of cryptocurrencies. In blockchain, information related to balances, transactions, and their history is recorded transparently and decentralized, controlled by no single person or entity. This feature enhances the quality of financial transactions since centralized systems and human workforce often lead to delays in transactions and reduce users' direct access to managing their assets.

With the emergence of DeFi, financial systems are moving towards operating independently of centralized entities, placing asset control in the hands of the investors themselves. This fundamental change in the financial structure not only increases the efficiency and speed of transactions but also strengthens users' trust in the financial system.

A Brief History of DeFi: From Inception to Boom

Although the roots of DeFi can be traced back to the early years of Bitcoin and ideas like Crypto-Pound, a pivotal point in this journey was in 2015 with the creation of MakerDAO. MakerDAO, as the first DeFi lending platform on Ethereum, enabled borrowing and lending of the stablecoin DAI through cryptocurrency collateralization.

The success of MakerDAO opened new doors to the world of DeFi and paved the way for similar projects like Compound. Compound, by introducing a reward system based on the COMP token, added to the popularity of DeFi and sparked the trend of yield farming. Yield farming involves staking cryptocurrencies on DeFi platforms to earn rewards and interest.

In 2020, DeFi reached its peak in popularity. Reports from reputable media outlets such as the Washington Post and Bloomberg drew public attention to this emerging field. During this time, Ethereum, as the main platform for many DeFi projects, experienced significant growth.

Today, despite challenges like price volatility, technical complexities, and security risks, DeFi continues to thrive. Innovative projects are emerging, and more users are seeking to utilize decentralized financial services and their benefits, such as the absence of intermediaries, high efficiency, transparency, and easy access.

Applications of DeFi

Financial Services through DeFi

DeFi is a comprehensive financial ecosystem, enabling a range of financial activities. But what exactly are these financial activities? They include issuing stablecoins and insurance policies. Activities typically conducted in centralized financial environments are performed simply and in a decentralized manner with DeFi.

Lending through DeFi

Decentralized lending systems are among the most popular protocols in DeFi. In these systems, you can use your digital assets as collateral for loans. You can also repay your loan through instant repayment options. This system eliminates all the problems and obstacles associated with borrowing from traditional systems.

Investment

If you are an investor looking to preserve your assets, you can earn higher returns compared to the real world. By storing cryptocurrencies and assets in the blockchain world, you receive interest while your assets are used for various purposes.

Staking and Yield Farming

Yield farming involves staking cryptocurrencies on specific platforms to earn monthly or yearly interest. The percentage of interest earned and the duration required for staking depend on the cryptocurrency and the platform offering it. Yield farming is one of the newest popular subjects among DeFi users that can yield significant profits.

Decentralized Exchanges using DeFi

Exchanges facilitate the trading of various cryptocurrencies or fiat currencies. Currently, most exchanges are centralized and operate under the supervision of governments and centralized organizations. DeFi allows users to trade their currencies in a decentralized manner and in a very short time, without the need for traditional systems and their associated bureaucracy. As a result, trading on decentralized financial systems is much more efficient than traditional exchanges.

Disadvantages of DeFi

Global Accessibility

By eliminating intermediaries and relying on blockchain technology, DeFi provides access to financial services for everyone worldwide, regardless of geographical location, economic status, or banking history. This is a significant advantage compared to traditional systems that create restrictions in many parts of the world.

Security and Privacy

DeFi, using blockchain technology, ensures high security and transparency in transactions and user data protection. In this system, no central authority controls user information and assets; users themselves are responsible for securing their investments. This is a notable advantage over traditional systems that are vulnerable to hacking and abuse by centralized entities.

Low Fees

In traditional systems, international transactions come with heavy fees. DeFi significantly reduces these fees by eliminating intermediaries and facilitating direct transactions between individuals. This is especially important for migrants who regularly send money to their families and businesses that deal with foreign partners.

Freedom and Censorship Resistance

DeFi, with its decentralized nature, is free from censorship and restrictions imposed by central authorities. In this system, anyone anywhere in the world can conduct transactions and manage their assets without limitations and with complete freedom.

Disadvantages of DeFi

Like any new phenomenon, DeFi is not without its flaws. Alongside its benefits, there are also drawbacks that need to be considered.

Risks Facing Investors in DeFi

Safeguarding Private Keys

In DeFi, your private keys are the gateway to your assets. Losing or forgetting them means losing all your investments.

Human Error

A simple mistake in typing the destination wallet address can send your assets to unknown individuals, resulting in their permanent loss.

Hidden Scams

The DeFi world is filled with fraudulent projects that deceive users with unrealistic promises and steal their investments.

Market Volatility

Severe price fluctuations in the cryptocurrency market can cause significant losses to DeFi investors.

Conclusion

Decentralized finance (DeFi) is a vast field aiming to provide financial services without intermediaries. It seeks to create a freer financial system by eliminating middlemen, making it accessible to everyone globally, and preventing corruption, censorship, and discrimination. DeFi applications run on blockchains that host smart contracts.

DeFi applications are blockchain-based financial programs that do not require centralized intermediaries such as brokers, exchanges, and banks to provide financial services. These applications use smart contracts on the blockchain, with Ethereum being the most common and largest host for these contracts.

DeFi has immense potential to transform the future of finance. In the future, users might be able to fully manage and control their financial affairs without needing banks and centralized institutions, having complete oversight of their assets.