What is Decentralized Finance (DeFi)? – Bitcoin System


Investment in cryptocurrencies has gained momentum in recent years. People have discovered Decentralized Finance and have shifted their investments in this direction. So, do we know what DeFi is? Let’s dive deep into DeFi.


DeFi Philosophy

Defi’s main idea is to eliminate middlemen.

We can define philosophy as the scientific explanation of something that exists by asking questions such as why and how. Although I am not a philosopher (that would be too ambitious for me), we can at least try to answer these questions and grasp the main logic.

Why is DeFi eliminating middlemen? I can actually say that my answer to this question is the same as the main idea in the creation of the blockchain. In fact, it can be said that this was the main idea of ​​the invention of the internet by going a little further.

In fact, the Internet was established to eliminate intermediaries in accessing information and to reach information faster. Readers my age will remember; Before the internet came to our country, it was necessary to go to the library and scan the encyclopedias to find information. Not every encyclopedia or book was available in the libraries of your county or city. Maybe it was necessary to go to the libraries of the universities, scan the bibliography and subject catalogs on that subject, and after reaching the book, find the relevant section and reach the information.

Think about the time that will pass. Thanks to the internet, you spend seconds to reach a sage. You can access that information immediately. All information is instantly uploaded to the internet. You can instantly see the information distributed around the world on your screen. What the internet brought us was direct access to information by eliminating intermediaries such as libraries. Because information should not be monopolized by anyone. Parallel to this philosophy, the financial environment, along with other fields, began to digitize. Digital branches of banks, which they call interactive, emerged.

Blockchain, on the other hand, emerged with the philosophy of eliminating intermediaries so that individuals can obtain their financial rights..

The worldwide economic crises (especially the 2008 crisis) had taken out the losses incurred by financial companies from individuals. States have compensated for the losses so that the branded companies do not go bankrupt. While companies redeem themselves, individuals could not. In response to this situation, Satoshi Nakamoto used encryption technology to transfer market confidence to the internet without being dependent on any central authority.

At the point we have reached now, DeFi aims to eliminate the banks or financial intermediaries that have taken the lion’s share of the market with digitalization, and individuals to have an equal share of this lion’s share.

It can be said that he pursues a more democratic and egalitarian philosophy. How blockchain technology will offer us a more democratic and equal organization (DAO) will be the subject of our next article.

After understanding this philosophy, you will find below the questions I am usually asked and the answers I try to give. I hope it will be helpful for you to understand this subject because DeFi has opened new horizons in many subjects.

What is DeFi?

Decentralized Finance (DeFi) is based on the interpersonal concept that removes intermediary systems. It allows anyone to borrow, lend and invest in crypto assets from anywhere in the world without the need for brokerages.

As long as you have an internet connection. Using this philosophy and its own autonomous smart contract technology on the blockchain, DeFi democratizes finance and replaces traditional centralized institutions such as banks, brokerage houses and non-bank financial companies.

What Does a Smart Contract Mean?

It is computer code that acts as a digital agreement between two parties. The smart contract runs on the blockchain network and is stored in a public database, it cannot be changed.

On the blockchain, smart contracts operate automatically without the need for a third party. The interpersonal transaction is closed only when the conditions in the contract are met. To gain access to DeFi services, investors communicate with these smart contracts via a wallet.

A smart contract by itself can only be used for one type of transaction. It will be necessary to use an application to perform different types of operations at the same time. Here, decentralized applications (dapp) have been developed to perform more sophisticated financial transactions with smart contracts on the blockchain. These are actually software.

What’s the Difference Between Bitcoin and DeFi?

Bitcoin is a decentralized digital currency with its own blockchain, used as a means of investment and savings. Whereas, DeFi is a concept that describes financial services built on public blockchains such as Bitcoin and Ethereum. But they are similar in philosophy.

What Can Be Done With DeFi?

Like the ones mentioned above, DeFi uses cryptocurrencies and smart contracts to provide financial services without the involvement of banks.

With the addition of more dApps, what we can do in DeFi continues to increase. Popular uses of DeFi include sending money anywhere in the world (in less time and at an affordable price), investing and saving in cryptocurrencies using crypto wallets (higher returns than a traditional bank), borrowing at the interpersonal level, and lending, trading cryptocurrencies anonymously and anytime 24/7, investing in stocks, funds, tokens and NFTs representing other financial assets.

So, How to Earn Money? (CEX/DEX)

Before DeFi came into our lives, crypto money investments could only be made from centralized exchanges (CEX). After becoming a member and verifying your identity, you can buy cryptocurrencies via the order book by sending money from your own bank account.

You can also make margin and contract transactions. You can send money to other wallets. These are things we all know already. However, as mentioned above, with the introduction of dapps, a new type of exchange entered our lives: Decentralized Exchanges (DEX).

With the help of a technology called Automatic Market Maker (AMM), a smart contract has taken over the task of order books on centralized exchanges. Liquidity pools, which are also a code, were created to ensure liquidity.

Investors started to earn significant passive income by locking their tokens into these liquidity pools. This service has attracted a lot of attention as it is easy to access and use and is unhindered, and there are still many people making money from it.

The main logic here is that users deposit their money into the pool (lease them) and in return receive the rent of their money, namely interest. DEXs use total locked value (TVL) held by smart contracts to gain investor confidence.

Since the topic is long, I’ll cut it off here for now. In the second part of this article, I will give my views on the risks and future in DeFi…

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