DeFi is short for decentralized finance. Unlike traditional financial systems that rely on intermediaries such as banks or financial institutions, DeFi works directly through blockchain technology. The main goal of DeFi is to recreate the traditional financial system (banks, exchanges, insurance, etc.) in a completely open, transparent way without centralized intermediaries.
How DeFi works
Most DeFi applications are built on blockchains that support smart contracts. These smart contracts are autonomous, self-executing programs that automate agreements and transactions. They eliminate the need for intermediaries (such as banks or lawyers) because the rules are encoded directly into the program and are transparent to everyone. For example:
- Transfer an amount of money on a specific date.
- Exchange cryptocurrencies automatically after a predefined rate.
Everything is public and traceable on the blockchain, which eliminates the risk of fraud and guarantees transparency.
DeFi is already used by millions of people for different purposes:
- Saving: Earn higher interest rates than those offered by traditional banks.
- Fast transactions: Make international transfers in minutes.
- Create passive income: Offer cash and receive rewards in cryptocurrencies.
- Avoid bank fees: Save money by eliminating middlemen.
DeFi pros and cons
Advantages
DeFi offers clear benefits that go beyond traditional financial systems:
- Universal access: anyone with an internet connection can use DeFi, with no geographic restrictions.
- No complicated paperwork: No need for bank accounts, complicated paperwork or time-consuming checks.
- Security and transparency: Blockchain eliminates the risk of fraud and provides complete visibility into transactions.
- Lower costs: With no intermediaries, fees are significantly lower.
- Personal control: You have 100% control over your funds without depending on a third party.
Disadvantages
A common question is about the security of DeFi. In general, DeFi platforms are secure due to the use of blockchain, which provides transparency and immutability. However, as with any investment, there are risks:
- Volatility: the cryptocurrency market is extremely volatile, which can affect the value of assets locked in DeFi.
- Complexity: Can be difficult for beginners to understand and use.
- Security Risks: Smart contract bugs, exploits or “rug pulls” (where developers abandon the project and abscond with funds) can lead to significant losses.
- Scalability: Current blockchain networks can face scalability issues (high fees and slow transaction speeds) in times of heavy traffic.
Find out in real time how the price of a cryptocurrency is evolving! Visit our cryptocurrency price page for complete data.